Quarterly Market Update PRIMARY CONTRIBUTORS Lisa Emsbo-Mattingly, CBE Director of Asset Allocation Research Dirk Hofschire, CFA SVP, Asset Allocation Research Jake Weinstein, CFA Research Analyst, Asset Allocation Research Jenna Christensen Research Associate, Asset Allocation Research Andrew Garvey Research Associate, Asset Allocation Research Third Quarter 2020 Commentary
Transcript
Quarterly Market UpdatePRIMARY CONTRIBUTORS
Lisa Emsbo-Mattingly CBEDirector of Asset Allocation Research
Dirk Hofschire CFASVP Asset Allocation Research
Jake Weinstein CFAResearch Analyst Asset Allocation Research
Jenna ChristensenResearch Associate Asset Allocation Research
Andrew GarveyResearch Associate Asset Allocation Research
Third Quarter 2020Commentary
Table of ContentsMarket Summary
EconomyMacro Backdrop
Asset Markets
Long-Term Themes
Market Summary
SUM
MAR
Y
MACRO
4
bull Global economy displayed sequential improvement as the re-opening phase began
bull Dramatic rebound in riskier asset prices
ASSET MARKETS
Q2 2020
OUTLOOK bull The worst of the recession is behind but activity levels remain well below normal
bull US progress is tentative and uneven amid a pick-up in new virus cases
bull Chinarsquos recovery is ahead of the rest of the world particularly its industrial activity
bull The historic monetary and fiscal response remains supportive but fiscal drag is a risk
bull Policy actions address the near-term deflationary shock but they might presage a long-term regime shift
bull Policy decisions are likely to have an increasingly large influence on asset returns
bull Tentative signs of economic stabilization warrant a relatively neutral near-term asset allocation positioning
bull Elevated market volatility is expected to continue due to uncertainty about the virus and economic outlook
Diversification does not ensure a profit or guarantee against a loss
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
SUM
MAR
Y
-4
0
4
8
12
16
1946
1948
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
5
Q2 2020 () YTD () Q2 2020 () YTD ()
US Small Cap Stocks 254 -130 Real Estate Stocks 118 -187US Mid Cap Stocks 246 -91 Emerging-Market Bonds 112 -19US Large Cap Stocks 205 -31 High Yield Bonds 96 -48Non-US Small Cap Stocks 199 -131 US Corporate Bonds 82 48Emerging-Market Stocks 181 -98 Long Government amp Credit Bonds 62 128Non-US Developed-Country Stocks 149 -113 Commodities 51 -194Gold 129 174 Investment-Grade Bonds 29 61
20-Year US Stock Returns Minus IG Bond Returns since 1946Annualized Return Difference ()
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Assets represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market BondsmdashJP Morgan EMBI Global Index Emerging-Market StocksmdashMSCI EM Index GoldmdashGold Bullion LBMA PM Fix High-Yield BondsmdashICE BofA High Yield Bond Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Non-US Developed-Country StocksmdashMSCI EAFE Index Non-US Small Cap StocksmdashMSCI EAFE Small Cap Index Real Estate StocksmdashFTSE NAREIT Equity Index US Corporate BondsmdashBloomberg Barclays US Credit Index US Large Cap StocksmdashSampP 500reg index US Mid Cap StocksmdashRussell Midcapreg Index US Small Cap StocksmdashRussell 2000reg Index Long Government amp Credit BondsmdashBloomberg Barclays Long Government amp Credit Index Source Bloomberg Finance LP Haver Analytics Fidelity Investments Asset Allocation Research Team (AART) as of 63020
Average since 1946 5
07
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
SUM
MAR
Y
40
50
60
70
80
90
100
110
0 30 60 90 120 150 180 210 240 270 300 330 360
1960 1970 1973 1980 1981 1990 2001 2008 2020
6
Since the 1973 peak is not regained until after the 1980 recession the 1980 line starts at its near term high on 2201980 Index SampP 500reg Lines represent a 5 day moving average table uses daily values and 1973 recession not included in average for return to peak All indexes are unmanaged You cannot invest directly in an index Past performance is no guarantee of future results Source Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Stock Market Drawdowns during Recessions (19602020)
Days since Peak
Index Peak = 100
Average since 1960 2020Total Drawdown -33 -34Drawdown Length (Days) 340 23Drawdown through Recession End -20 -8 (63020)Days to Return to Peak 756
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
SUM
MAR
Y
$0
$1
$2
$3
$4
$5
$6
$7
May
-15
Nov
-15
May
-16
Nov
-16
May
-17
Nov
-17
May
-18
Nov
-18
May
-19
Nov
-19
May
-20
Transfer Receipts from Govt Personal Savings
LEFT Source Bureau of Economic Analysis Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT Source SIFMA Fidelity Investments (AART) as of 53120 7
$0
$200
$400
$600
$800
$1000
$1200
2015 2016 2017 2018 2019 2020
New Debt Issuance (JanndashMay)
Trillions Billions
Personal Savings and Government Stimulus Corporate Bond New Issuance
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
SUM
MAR
Y
-10
-05
00
05
10
15
20
25
30
35
40
Jun-
2010
Oct
-201
0
Feb-
2011
Jun-
2011
Oct
-201
1
Feb-
2012
Jun-
2012
Oct
-201
2
Feb-
2013
Jun-
2013
Oct
-201
3
Feb-
2014
Jun-
2014
Oct
-201
4
Feb-
2015
Jun-
2015
Oct
-201
5
Feb-
2016
Jun-
2016
Oct
-201
6
Feb-
2017
Jun-
2017
Oct
-201
7
Feb-
2018
Jun-
2018
Oct
-201
8
Feb-
2019
Jun-
2019
Oct
-201
9
Feb-
2020
Jun-
2020
Inflation Expectations Real Yields Nominal Yield
8
Yield
Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
ECO
NO
MY
10
DYNAMIC ASSET ALLOCATION TIMELINE
Business Cycle
(10ndash30 years)Secular
HORIZONS
(1ndash10 years)
Tactical(1ndash12 months)
Portfolio ConstructionAsset Class | CountryRegion | Sectors | Correlations
For illustrative purposes only Source Fidelity Investments (AART) as of 63020
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
ECO
NO
MY
11
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 A growth recession is a significant decline in activity relative to a countryrsquos long-term economic potential We use the ldquogrowth cyclerdquo definition for most developing economies such as China because they tend to exhibit strong trend performance driven by rapid factor accumulation and increases in productivity and the deviation from the trend tends to matter most for asset returns We use the classic definition of recession involving an outright contraction in economic activity for developed economies Source Fidelity Investments (AART) as of 63020
Business Cycle Framework
ChinaUS Eurozone UK Canada Australia
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
European energy demand is reflected by a five-day moving average of daily electric loads Chinese energy demand is reflected by a seven-day moving average of daily coal consumption and US energy demand is reflected by weekly electric output The distance from average for the US and Europe is calculated as the current yearrsquos data as a percentage above or below the 2017ndash2019 weekly average The distance from average for the China is calculated as the current yearrsquos data as a percentage above or below the 2017ndash2019 daily average indexed to the Chinese New Year GDP-weighted countries in Europe include Italy Germany United Kingdom Spain Austria and France Source CCTD European Network of Transmission System Operators for Electricity Edison Electric Institute Haver Analytics Fidelity Investments (AART) as of 62820 12
Distance from Average
High-Frequency Energy Demand
-12-9-2
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
ECO
NO
MY
25
30
35
40
45
50
55
60
65
70
75
0
10
20
30
40
50
60
70
80
90
100
Dec
-05
Sep-
06Ju
n-07
Mar
-08
Dec
-08
Oct
-09
Jul-1
0Ap
r-11
Jan-
12O
ct-1
2Au
g-13
May
-14
Feb-
15N
ov-1
5Au
g-16
Jun-
17M
ar-1
8D
ec-1
8Se
p-19
Jun-
20
AART Industrial Production Diffusion IndexPMI New Export Orders
PMI Purchasing Managers Index A reading above 50 indicates the manufacturing economy is generally expanding below 50 indicates it is generally contracting AART Industrial Production Diffusion Index is a proprietary index based on industrial production data Gray bars represent China growth recessions as defined by AART LEFT Source China National Bureau of Statistics Haver Analytics Fidelity Investments (AART) AART Diffusion Index as of 53120 PMI as of 6302020 RIGHT Index values above 100 denote optimism values below 100 denote pessimism and an index value of 100 denotes neutral sentiment Source China National Bureau of Statistics Haver Analytics Fidelity Investments (AART) as of 53120 13
China Industrial Activity China Consumer Confidence Index
90
95
100
105
110
115
120
125
130
Jun-
10
Jun-
11
Jun-
12
Jun-
13
Jun-
14
Jun-
15
Jun-
16
Jun-
17
Jun-
18
Jun-
19
Jun-
20
Consumer Confidence Index
Percent of Industries in Expansion Index Value 100 = Neutral SentimentPMI
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
ECO
NO
MY
LEFT Source Census Haver Analytics Fidelity Investments (AART) as of 62720 RIGHT Workers receiving unemployment insurance ldquoWith $250rdquo is if extra benefit is reduced to that level after expiration of $600 Worker income cohorts are defined by percentiles low Income (25th percentile) middle income (50th percentile) and high income (75th percentile) Working paper ldquoUS Unemployment Insurance Replacement Rates During the Pandemicrdquo by Ganong Noel and Vavra Fidelity Investments (AART) as of 53120 14
-60
-40
-20
0
20
40
60
80
100
LowIncome
MiddleIncome
HighIncome
With $600 CARES Benefit With $250
Percent Above or Below Normal Income
Weekly Earnings of Unemployed Individuals
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
0
001
002
003
004
005
006
007
008
009
01
0
1
2
3
4
5
6
7
Jun-
07
Jun-
08
Jun-
09
Jun-
10
Jun-
11
Jun-
12
Jun-
13
Jun-
14
Jun-
15
Jun-
16
Jun-
17
Jun-
18
Jun-
19
Jun-
20
Initial Claims
Millions
US Unemployment Claims
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Conference Board Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Other industries most impacted shaded in blue include For GDP Recreation Services Autos Transportation Services Recreation Goods Clothing Gasoline Furnishings For Employment Retail Transportation Source Conference Board NBER Haver Analytics Fidelity Investments (AART) as of 2292015
Restaurants and Hotels
Leisure and Hospitality
0
5
10
15
20
25
GDP Private Employment
Largest Affected Industry Other
Sectors Most Impacted by COVID-19
Share
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Consumer Sentiment
00
1
2
3
4
5
6
7
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
2020
Consumer ExpectationsPresent Situation
Ratio
ECO
NO
MY
ldquoFastrdquo reopening states include Arizona Florida Georgia and Texas ldquoSlowrdquo reopening states include Massachusetts New York and New Jersey LEFT Source Johns Hopkins University Haver Analytics Fidelity Investments (AART) as of 7320 RIGHT Baseline is defined as the median for that day of the week during the period 1420ndash13120 Source OpenTable Homebase Haver Analytics Fidelity Investments (AART) as of 62620
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
Hours Worked byEmployees
Local BusinessesOpen
OpenTableReservations YoY
April Trough 62620 61820
Cases (Five Day Moving Average)
New COVID-19 Cases Daily Data in ldquoFastrdquo Reopening States
Hours and Businesses (0 = Baseline) Year-Over-Year
16
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
0
1000
2000
3000
4000
5000
6000
7000
8000
33
203
102
03
172
03
242
03
312
04
720
414
20
421
20
428
20
55
205
122
05
192
05
262
06
220
69
206
162
06
232
06
302
0
Fast Reopening States Slow Reopening States
ECO
NO
MY
-30
-20
-10
0
10
20
30
Jun-19 Sep-19 Dec-19 Mar-20 Jun-20
2020 2021
40
50
60
70
80
90
100
110
120
-12 -9 -6 -3 0 3 6 9 12 15 18 21 24 27 30 33 36
Months (t=0 is start of recession)
Average since 1980 2007ndash20082020ndash22 Consensus Estimate
LEFT AND RIGHT EPS Earnings per share Past performance is no guarantee of future results Source Bloomberg Finance LP Fidelity Investments (AART) Haver Analytics as of 6252017
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
ECO
NO
MY
050
075
100
125
150
175
200
225
250
275
ClevelandFed
AtlantaFed
New YorkFed
CoreCPI
May-2020 Dec-2019
LEFT CPI Consumer Price Index Core CPI excludes Food and Energy Cleveland Fed Cleveland 16 Trimmed Mean CPI Atlanta Fed StickyCPI New York Fed Underlying Inflation Gauge Source Federal Reserve Board Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GFC Global Financial Crisis Inflation curves derived from Inflation swaps Source Bloomberg Financial Fidelity Investments (AART) as of 6302018
Measures of US Inflation
Year-Over-Year
050
075
100
125
150
175
200
225
250
275
1 2 3 4 5 6 7 8 9 10 20 30Years
Expected CPI Year-Over-Year
US Inflation Expectations
June 2010
June 2020
GFC
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Federal Reserve Board NBER Bureau of Economic Analysis Haver Analytics Fidelity Investments (AART) as of 33120 RIGHT The 50 of households with the lowest incomes Source Federal Reserve Board Bureau of Economic Analysis World Inequality Data Haver Analytics Fidelity Investments (AART) as of 12311819
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
0
0
0
0
0
0
0
0
0
0
0
70
75
80
85
90
95
100
105
1993 1996 1999 2002 2005 2008 2011 2014 2017 2020
Non-Financial Corporate CreditRevenues
12
13
14
15
16
17
18
19
20
21
300
350
400
450
500
550
600
1976 1981 1986 1991 1996 2001 2006 2011 2016
Financial Assets Bottom 50 Household Income
Household Financial Assets and Income
Share of Household Income
US Corporate Debt
Ratio Share of Disposable Income
ECO
NO
MY
-$1000
$0
$1000
$2000
$3000
$4000
$5000
May
-201
1
Nov
-201
1
May
-201
2
Nov
-201
2
May
-201
3
Nov
-201
3
May
-201
4
Nov
-201
4
May
-201
5
Nov
-201
5
May
-201
6
Nov
-201
6
May
-201
7
Nov
-201
7
May
-201
8
Nov
-201
8
May
-201
9
Nov
-201
9
May
-202
0
UK Japan Eurozone US Total
20
Billions (12-Month Change)
QE Quantitative Easing Source Federal Reserve Bank of Japan European Central Bank Bank of England Haver Analytics Fidelity Investments (AART) as of 53120
Central Bank Balance Sheets
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
ECO
NO
MY
-20
-15
-10
-5
0
5
10
-100
-075
-050
-025
000
025
050
075
100
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
State and Local Government Federal Government Federal Budget Deficit
Source CBO BEA Haver Analytics 2020 and 2021 Budget Deficits are CBO projections (httpswwwcbogovsystemfiles2020-0456344-CBO-presentationpdf ) Fidelity Investments (AART) 21
Percent of GDP
US Federal Fiscal Deficit and Government Impact on GDP
Contribution to GDP
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
ECO
NO
MY
22 Ag Agriculture FDI Foreign direct investment ADR American depositary receipt Source Fidelity Investments (AART) as of 63020
US-China Relationship
Geopolitical Rivalry
Trade
Industrial Policy Issuesbull IT sectorbull Health carebull Supply chains
Strategic Competition
Policy Tools of De-Globalization
Military Hegemony
in Asia
Economic Advantage in
Key Areas
Consumer and Other
Goods
Bilateral Flashpointsbull Hong Kongbull Detention campsbull Taiwanbull South China Sea
Policy Action Categories Example
TariffTrade Barriers Raise tariffs to reduce imports
Export and FDI Restrictions Curtail high-tech exports
Industrial Policies Mandate supply chainonshoring
ImmigrationHuman Mobility Tighter borders
Financial Restrictions Penalties
US sanctions tax policies
InfoData Restrictions Chinas firewall
Portfolio Investment Restrictions
US de-lists Chinese ADRs
Politicized Debt Action Selective US default
BroadEconomic
Investment
TariffsMarket Accessbull Phase 1 ag deal
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
ECO
NO
MY
Risks
23
Business Cycle
Asset Allocation Implications
US is in process of emerging from a brief but sharp recession
Policymakers providing abundant support to markets and economy
Emphasize focus on diversified anddisciplined investment strategies
Members hold a wide range of views but see opportunities within asset classes
Opportunities include non-US assets US small cap and value equities TIPS and gold
For illustrative purposes only Diversification does not ensure a profit or guarantee against a loss Source Fidelity Investments (AART) as of 63020
The recovery remains highly uncertain given the size and exogenous nature of
the COVID shock
Policy actions are playing a larger role in driving financial market performance than
in past cycles
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
ASSE
TM
ARKE
TS
EM Emerging Markets EMEA Europe the Middle East and Africa For indexes and other important information used to represent above asset categories see Appendix Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged Sector returns represented by SampP 500 sectors Sector investing involves risk Because of its narrow focus sector investing may be more volatile than investing in more diversified baskets of securities Source Bloomberg Finance LP Fidelity Investments (AART) as of 6302025
US Equity Styles Total ReturnInternational Equities and Global Assets Total Return
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
For illustrative purposes only Past performance is no guarantee of future results Diversification does not ensure a profit or guarantee against a loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Fidelity proprietary analysis based on Monte Carlo simulations using historical index returns Domestic Equity Dow Jones US Total Stock Market Index Foreign Equity MSCI ACWI ex USA Index Investment Grade (IG) Bonds Bloomberg Barclays US Aggregate Bond Index High Yield (HY) Bonds ICE BofA US High Yield Index Source Fidelity Investments Morningstar Bloomberg Barclays data as of 63020
-10
-5
0
5
10
15
20
25
Early Mid Late Recession
US Stocks IG Bonds Cash
Annualized Real ReturnAnnualized Nominal Return
75th
percentile
25th
percentile
Median
Asset Class Performance by Cycle Phase (1950ndash2018)
10-Year Portfolio Return Distribution by Cycle Phase Starting Point
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
ASSE
TM
ARKE
TS
-40
-30
-20
-10
0
10
20
30
40
Jun-
12
Sep-
12
Dec
-12
Mar
-13
Jun-
13
Sep-
13
Dec
-13
Mar
-14
Jun-
14
Sep-
14
Dec
-14
Mar
-15
Jun-
15
Sep-
15
Dec
-15
Mar
-16
Jun-
16
Sep-
16
Dec
-16
Mar
-17
Jun-
17
Sep-
17
Dec
-17
Mar
-18
Jun-
18
Sep-
18
Dec
-18
Mar
-19
Jun-
19
Sep-
19
Dec
-19
Mar
-20
Jun-
20
EM DM US
27Past performance is no guarantee of future results DM Developed Markets EM Emerging Markets EPS Earnings per share Forward EPS Next 12 months expectations Source MSCI Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Global EPS Growth (Trailing 12 Months)
Forward EPS
53
01-49
Percent
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
ASSE
TM
ARKE
TS
0
5
10
15
20
25
2005 2008 2011 2014 2017 2020
DM Trailing PE EM Trailing PE US Trailing PE Forward PE
28
DM Non-US Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Price-to-earnings ratio (PE) stock price divided by earnings per share Also known as the multiple PE gives investors an idea of how much they are paying for a companyrsquos earnings power Long-term average PE for Emerging Markets includes data for 1988ndash2017 for Non-US Developed Markets 1973ndash2016 for the United States 1926ndash2017 Indexes DMmdashMSCI EAFE Index EMmdashMSCI EM Index United StatesmdashSampP 500 Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
EM
US
DM
DM Long-Term Average
US Long-Term Average
EM Long-Term Average
Global Stock Market PE Ratios
Ratio
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
ASSE
TM
ARKE
TS
0
10
20
30
40
50
60
70
80
90
100
Rus
sia
Turk
eySp
ain
Sout
h Ko
rea
UK
Indo
nesi
aC
hina
Aust
ralia EM
Braz
ilIta
lyM
exic
oG
erm
any
Philip
pine
sD
MFr
ance
Can
ada
Japa
nIn
dia
US
-35
-30
-25
-20
-15
-10
-5
0
5
10
GBP JPY CAD EUR CNY
29
DM Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information LEFT Price-to-earnings (PE) ratio (or multiple) stock price divided by earnings per share which indicates how much investors are paying for a companyrsquos earnings power Cyclically adjusted earnings are 10-year averages adjusted for inflation Source FactSet countriesrsquo statistical organizations Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GBPmdashBritish pound JPYmdashJapanese yen CADmdashCanadian dollar EURmdasheuro CNYmdashChinese yuanSource Federal Reserve Board Haver Analytics Fidelity Investments (AART) as of 63020
53120 20-Year Range
Valuation of Real Exchange Rates
Expensive vs $
Cheap vs $
Shiller CAPE
Last 12-Month Range 63020
Cyclically Adjusted PEs Valuation of Major Currencies vs USD
Non-US Equity and Forex Valuations Relatively AttractiveCyclically adjusted PE (CAPE) ratios for international developed-market and emerging-market equities remained below US valuations providing a relatively favorable long-term backdrop for non-US stocks In Q2 the US dollar depreciated against many of the worldrsquos major currencies nevertheless US dollar valuations remain relatively expensive overall
ASSE
TM
ARKE
TS
LEFT TIPS Treasury Inflation-Protected Securities SOURCE Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Source CME Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 6302030
00
05
10
15
20
25
30
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
10 Year LT Average (Since 1998)
US Treasury Breakeven Inflation Rates
Yield
$0
$20
$40
$60
$80
$100
$120
$140
$160
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
WTI Crude Oil
Inflation Adjusted Price (March 2020 Dollars)
Real Oil Price
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
ASSE
TM
ARKE
TS
31
Past performance is no guarantee of future results Sectors as defined by GICS White line is a theoretical representation of the business cycle as it moves through early mid late and recession phases Green and red shaded portions above respectively represent over- or underperformance relative to the broader market unshaded (white) portions suggest no clear pattern of over- or underperformance Double +ndash signs indicate that the sector is showing a consistent signal across all three metrics full-phase average performance median monthly difference and cycle hit rate A single +ndash indicates a mixed or less consistent signal Return data from 1962 to 2016 Source Fidelity Investments (AART) as of 63020
Business-Cycle Approach to SectorsSector EARLY CYCLE
Economically sensitive sectors may tend to outperform while more defensive sectors have
tended to underperform
Making marginal portfolio allocation changes to manage
drawdown risk with sectorsmay enhance risk-adjusted
returns during this cycle
Defensive and inflation-resistantsectors tend to perform better
while more cyclical sectors underperform
Since performance is generally negative in
recessions investors should focus on the most defensive
historically stable sectors
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
ASSE
TM
ARKE
TS
400
420
440
460
480
500
520
540
092
094
096
098
100
102
104
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18D
ec-1
8M
ar-1
9Ju
n-19
Sep-
19D
ec-1
9M
ar-2
0Ju
n-20
Value vs Growth Performance CRB Raw Industrials Index
LEFT Gray bars represent US recessions as defined by NBER Asset classes represented by Value Fidelity Value ETF Growth Russell 1000reg
Growth Index Commodity Prices CRB Raw Industrials Index Source Federal Reserve Board NBER Haver Analytics Bloomberg Finance LP Fidelity Investments (AART) as of 63020 RIGHT Asset classes represented by Growth Russell 1000reg Growth Index Value Russell 1000reg Value Index Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020 Past performance is no guarantee of future results All indexes are unmanaged You cannot invest directly in an index Unlike mutual funds ETF shares are bought and sold at market price which may be higher or lower than their NAV and are not individually redeemed from the fund32
Value Equity More Attractive after Long UnderperformanceOn a cyclical basis the relative performance of value stocks has tended to correlate generally with the direction of the global economy and in particular with commodity prices which may be bottoming after the worldwide COVID-19 shutdown Meanwhile after a decade of trailing other leading factors and styles valuersquos relative valuations are at their most attractive in roughly 20 years
Price-to-Book Valuation SpreadsValue Relative Performance vs Commodity Prices
Ratio PB RatioIndex
0
1
2
3
4
5
6
7
8
9
10
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Growth vs Value
ASSE
TM
ARKE
TS
33
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Percentile ranks of yields and spreads based on historical period from 1993 to 2020 MBS mortgage-backed securities Source Bloomberg Barclays Bank of America Merrill Lynch JP Morgan Fidelity Investments (AART) as of 63020
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
Table of ContentsMarket Summary
EconomyMacro Backdrop
Asset Markets
Long-Term Themes
Market Summary
SUM
MAR
Y
MACRO
4
bull Global economy displayed sequential improvement as the re-opening phase began
bull Dramatic rebound in riskier asset prices
ASSET MARKETS
Q2 2020
OUTLOOK bull The worst of the recession is behind but activity levels remain well below normal
bull US progress is tentative and uneven amid a pick-up in new virus cases
bull Chinarsquos recovery is ahead of the rest of the world particularly its industrial activity
bull The historic monetary and fiscal response remains supportive but fiscal drag is a risk
bull Policy actions address the near-term deflationary shock but they might presage a long-term regime shift
bull Policy decisions are likely to have an increasingly large influence on asset returns
bull Tentative signs of economic stabilization warrant a relatively neutral near-term asset allocation positioning
bull Elevated market volatility is expected to continue due to uncertainty about the virus and economic outlook
Diversification does not ensure a profit or guarantee against a loss
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
SUM
MAR
Y
-4
0
4
8
12
16
1946
1948
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
5
Q2 2020 () YTD () Q2 2020 () YTD ()
US Small Cap Stocks 254 -130 Real Estate Stocks 118 -187US Mid Cap Stocks 246 -91 Emerging-Market Bonds 112 -19US Large Cap Stocks 205 -31 High Yield Bonds 96 -48Non-US Small Cap Stocks 199 -131 US Corporate Bonds 82 48Emerging-Market Stocks 181 -98 Long Government amp Credit Bonds 62 128Non-US Developed-Country Stocks 149 -113 Commodities 51 -194Gold 129 174 Investment-Grade Bonds 29 61
20-Year US Stock Returns Minus IG Bond Returns since 1946Annualized Return Difference ()
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Assets represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market BondsmdashJP Morgan EMBI Global Index Emerging-Market StocksmdashMSCI EM Index GoldmdashGold Bullion LBMA PM Fix High-Yield BondsmdashICE BofA High Yield Bond Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Non-US Developed-Country StocksmdashMSCI EAFE Index Non-US Small Cap StocksmdashMSCI EAFE Small Cap Index Real Estate StocksmdashFTSE NAREIT Equity Index US Corporate BondsmdashBloomberg Barclays US Credit Index US Large Cap StocksmdashSampP 500reg index US Mid Cap StocksmdashRussell Midcapreg Index US Small Cap StocksmdashRussell 2000reg Index Long Government amp Credit BondsmdashBloomberg Barclays Long Government amp Credit Index Source Bloomberg Finance LP Haver Analytics Fidelity Investments Asset Allocation Research Team (AART) as of 63020
Average since 1946 5
07
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
SUM
MAR
Y
40
50
60
70
80
90
100
110
0 30 60 90 120 150 180 210 240 270 300 330 360
1960 1970 1973 1980 1981 1990 2001 2008 2020
6
Since the 1973 peak is not regained until after the 1980 recession the 1980 line starts at its near term high on 2201980 Index SampP 500reg Lines represent a 5 day moving average table uses daily values and 1973 recession not included in average for return to peak All indexes are unmanaged You cannot invest directly in an index Past performance is no guarantee of future results Source Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Stock Market Drawdowns during Recessions (19602020)
Days since Peak
Index Peak = 100
Average since 1960 2020Total Drawdown -33 -34Drawdown Length (Days) 340 23Drawdown through Recession End -20 -8 (63020)Days to Return to Peak 756
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
SUM
MAR
Y
$0
$1
$2
$3
$4
$5
$6
$7
May
-15
Nov
-15
May
-16
Nov
-16
May
-17
Nov
-17
May
-18
Nov
-18
May
-19
Nov
-19
May
-20
Transfer Receipts from Govt Personal Savings
LEFT Source Bureau of Economic Analysis Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT Source SIFMA Fidelity Investments (AART) as of 53120 7
$0
$200
$400
$600
$800
$1000
$1200
2015 2016 2017 2018 2019 2020
New Debt Issuance (JanndashMay)
Trillions Billions
Personal Savings and Government Stimulus Corporate Bond New Issuance
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
SUM
MAR
Y
-10
-05
00
05
10
15
20
25
30
35
40
Jun-
2010
Oct
-201
0
Feb-
2011
Jun-
2011
Oct
-201
1
Feb-
2012
Jun-
2012
Oct
-201
2
Feb-
2013
Jun-
2013
Oct
-201
3
Feb-
2014
Jun-
2014
Oct
-201
4
Feb-
2015
Jun-
2015
Oct
-201
5
Feb-
2016
Jun-
2016
Oct
-201
6
Feb-
2017
Jun-
2017
Oct
-201
7
Feb-
2018
Jun-
2018
Oct
-201
8
Feb-
2019
Jun-
2019
Oct
-201
9
Feb-
2020
Jun-
2020
Inflation Expectations Real Yields Nominal Yield
8
Yield
Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
ECO
NO
MY
10
DYNAMIC ASSET ALLOCATION TIMELINE
Business Cycle
(10ndash30 years)Secular
HORIZONS
(1ndash10 years)
Tactical(1ndash12 months)
Portfolio ConstructionAsset Class | CountryRegion | Sectors | Correlations
For illustrative purposes only Source Fidelity Investments (AART) as of 63020
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
ECO
NO
MY
11
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 A growth recession is a significant decline in activity relative to a countryrsquos long-term economic potential We use the ldquogrowth cyclerdquo definition for most developing economies such as China because they tend to exhibit strong trend performance driven by rapid factor accumulation and increases in productivity and the deviation from the trend tends to matter most for asset returns We use the classic definition of recession involving an outright contraction in economic activity for developed economies Source Fidelity Investments (AART) as of 63020
Business Cycle Framework
ChinaUS Eurozone UK Canada Australia
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
European energy demand is reflected by a five-day moving average of daily electric loads Chinese energy demand is reflected by a seven-day moving average of daily coal consumption and US energy demand is reflected by weekly electric output The distance from average for the US and Europe is calculated as the current yearrsquos data as a percentage above or below the 2017ndash2019 weekly average The distance from average for the China is calculated as the current yearrsquos data as a percentage above or below the 2017ndash2019 daily average indexed to the Chinese New Year GDP-weighted countries in Europe include Italy Germany United Kingdom Spain Austria and France Source CCTD European Network of Transmission System Operators for Electricity Edison Electric Institute Haver Analytics Fidelity Investments (AART) as of 62820 12
Distance from Average
High-Frequency Energy Demand
-12-9-2
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
ECO
NO
MY
25
30
35
40
45
50
55
60
65
70
75
0
10
20
30
40
50
60
70
80
90
100
Dec
-05
Sep-
06Ju
n-07
Mar
-08
Dec
-08
Oct
-09
Jul-1
0Ap
r-11
Jan-
12O
ct-1
2Au
g-13
May
-14
Feb-
15N
ov-1
5Au
g-16
Jun-
17M
ar-1
8D
ec-1
8Se
p-19
Jun-
20
AART Industrial Production Diffusion IndexPMI New Export Orders
PMI Purchasing Managers Index A reading above 50 indicates the manufacturing economy is generally expanding below 50 indicates it is generally contracting AART Industrial Production Diffusion Index is a proprietary index based on industrial production data Gray bars represent China growth recessions as defined by AART LEFT Source China National Bureau of Statistics Haver Analytics Fidelity Investments (AART) AART Diffusion Index as of 53120 PMI as of 6302020 RIGHT Index values above 100 denote optimism values below 100 denote pessimism and an index value of 100 denotes neutral sentiment Source China National Bureau of Statistics Haver Analytics Fidelity Investments (AART) as of 53120 13
China Industrial Activity China Consumer Confidence Index
90
95
100
105
110
115
120
125
130
Jun-
10
Jun-
11
Jun-
12
Jun-
13
Jun-
14
Jun-
15
Jun-
16
Jun-
17
Jun-
18
Jun-
19
Jun-
20
Consumer Confidence Index
Percent of Industries in Expansion Index Value 100 = Neutral SentimentPMI
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
ECO
NO
MY
LEFT Source Census Haver Analytics Fidelity Investments (AART) as of 62720 RIGHT Workers receiving unemployment insurance ldquoWith $250rdquo is if extra benefit is reduced to that level after expiration of $600 Worker income cohorts are defined by percentiles low Income (25th percentile) middle income (50th percentile) and high income (75th percentile) Working paper ldquoUS Unemployment Insurance Replacement Rates During the Pandemicrdquo by Ganong Noel and Vavra Fidelity Investments (AART) as of 53120 14
-60
-40
-20
0
20
40
60
80
100
LowIncome
MiddleIncome
HighIncome
With $600 CARES Benefit With $250
Percent Above or Below Normal Income
Weekly Earnings of Unemployed Individuals
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
0
001
002
003
004
005
006
007
008
009
01
0
1
2
3
4
5
6
7
Jun-
07
Jun-
08
Jun-
09
Jun-
10
Jun-
11
Jun-
12
Jun-
13
Jun-
14
Jun-
15
Jun-
16
Jun-
17
Jun-
18
Jun-
19
Jun-
20
Initial Claims
Millions
US Unemployment Claims
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Conference Board Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Other industries most impacted shaded in blue include For GDP Recreation Services Autos Transportation Services Recreation Goods Clothing Gasoline Furnishings For Employment Retail Transportation Source Conference Board NBER Haver Analytics Fidelity Investments (AART) as of 2292015
Restaurants and Hotels
Leisure and Hospitality
0
5
10
15
20
25
GDP Private Employment
Largest Affected Industry Other
Sectors Most Impacted by COVID-19
Share
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Consumer Sentiment
00
1
2
3
4
5
6
7
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
2020
Consumer ExpectationsPresent Situation
Ratio
ECO
NO
MY
ldquoFastrdquo reopening states include Arizona Florida Georgia and Texas ldquoSlowrdquo reopening states include Massachusetts New York and New Jersey LEFT Source Johns Hopkins University Haver Analytics Fidelity Investments (AART) as of 7320 RIGHT Baseline is defined as the median for that day of the week during the period 1420ndash13120 Source OpenTable Homebase Haver Analytics Fidelity Investments (AART) as of 62620
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
Hours Worked byEmployees
Local BusinessesOpen
OpenTableReservations YoY
April Trough 62620 61820
Cases (Five Day Moving Average)
New COVID-19 Cases Daily Data in ldquoFastrdquo Reopening States
Hours and Businesses (0 = Baseline) Year-Over-Year
16
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
0
1000
2000
3000
4000
5000
6000
7000
8000
33
203
102
03
172
03
242
03
312
04
720
414
20
421
20
428
20
55
205
122
05
192
05
262
06
220
69
206
162
06
232
06
302
0
Fast Reopening States Slow Reopening States
ECO
NO
MY
-30
-20
-10
0
10
20
30
Jun-19 Sep-19 Dec-19 Mar-20 Jun-20
2020 2021
40
50
60
70
80
90
100
110
120
-12 -9 -6 -3 0 3 6 9 12 15 18 21 24 27 30 33 36
Months (t=0 is start of recession)
Average since 1980 2007ndash20082020ndash22 Consensus Estimate
LEFT AND RIGHT EPS Earnings per share Past performance is no guarantee of future results Source Bloomberg Finance LP Fidelity Investments (AART) Haver Analytics as of 6252017
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
ECO
NO
MY
050
075
100
125
150
175
200
225
250
275
ClevelandFed
AtlantaFed
New YorkFed
CoreCPI
May-2020 Dec-2019
LEFT CPI Consumer Price Index Core CPI excludes Food and Energy Cleveland Fed Cleveland 16 Trimmed Mean CPI Atlanta Fed StickyCPI New York Fed Underlying Inflation Gauge Source Federal Reserve Board Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GFC Global Financial Crisis Inflation curves derived from Inflation swaps Source Bloomberg Financial Fidelity Investments (AART) as of 6302018
Measures of US Inflation
Year-Over-Year
050
075
100
125
150
175
200
225
250
275
1 2 3 4 5 6 7 8 9 10 20 30Years
Expected CPI Year-Over-Year
US Inflation Expectations
June 2010
June 2020
GFC
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Federal Reserve Board NBER Bureau of Economic Analysis Haver Analytics Fidelity Investments (AART) as of 33120 RIGHT The 50 of households with the lowest incomes Source Federal Reserve Board Bureau of Economic Analysis World Inequality Data Haver Analytics Fidelity Investments (AART) as of 12311819
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
0
0
0
0
0
0
0
0
0
0
0
70
75
80
85
90
95
100
105
1993 1996 1999 2002 2005 2008 2011 2014 2017 2020
Non-Financial Corporate CreditRevenues
12
13
14
15
16
17
18
19
20
21
300
350
400
450
500
550
600
1976 1981 1986 1991 1996 2001 2006 2011 2016
Financial Assets Bottom 50 Household Income
Household Financial Assets and Income
Share of Household Income
US Corporate Debt
Ratio Share of Disposable Income
ECO
NO
MY
-$1000
$0
$1000
$2000
$3000
$4000
$5000
May
-201
1
Nov
-201
1
May
-201
2
Nov
-201
2
May
-201
3
Nov
-201
3
May
-201
4
Nov
-201
4
May
-201
5
Nov
-201
5
May
-201
6
Nov
-201
6
May
-201
7
Nov
-201
7
May
-201
8
Nov
-201
8
May
-201
9
Nov
-201
9
May
-202
0
UK Japan Eurozone US Total
20
Billions (12-Month Change)
QE Quantitative Easing Source Federal Reserve Bank of Japan European Central Bank Bank of England Haver Analytics Fidelity Investments (AART) as of 53120
Central Bank Balance Sheets
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
ECO
NO
MY
-20
-15
-10
-5
0
5
10
-100
-075
-050
-025
000
025
050
075
100
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
State and Local Government Federal Government Federal Budget Deficit
Source CBO BEA Haver Analytics 2020 and 2021 Budget Deficits are CBO projections (httpswwwcbogovsystemfiles2020-0456344-CBO-presentationpdf ) Fidelity Investments (AART) 21
Percent of GDP
US Federal Fiscal Deficit and Government Impact on GDP
Contribution to GDP
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
ECO
NO
MY
22 Ag Agriculture FDI Foreign direct investment ADR American depositary receipt Source Fidelity Investments (AART) as of 63020
US-China Relationship
Geopolitical Rivalry
Trade
Industrial Policy Issuesbull IT sectorbull Health carebull Supply chains
Strategic Competition
Policy Tools of De-Globalization
Military Hegemony
in Asia
Economic Advantage in
Key Areas
Consumer and Other
Goods
Bilateral Flashpointsbull Hong Kongbull Detention campsbull Taiwanbull South China Sea
Policy Action Categories Example
TariffTrade Barriers Raise tariffs to reduce imports
Export and FDI Restrictions Curtail high-tech exports
Industrial Policies Mandate supply chainonshoring
ImmigrationHuman Mobility Tighter borders
Financial Restrictions Penalties
US sanctions tax policies
InfoData Restrictions Chinas firewall
Portfolio Investment Restrictions
US de-lists Chinese ADRs
Politicized Debt Action Selective US default
BroadEconomic
Investment
TariffsMarket Accessbull Phase 1 ag deal
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
ECO
NO
MY
Risks
23
Business Cycle
Asset Allocation Implications
US is in process of emerging from a brief but sharp recession
Policymakers providing abundant support to markets and economy
Emphasize focus on diversified anddisciplined investment strategies
Members hold a wide range of views but see opportunities within asset classes
Opportunities include non-US assets US small cap and value equities TIPS and gold
For illustrative purposes only Diversification does not ensure a profit or guarantee against a loss Source Fidelity Investments (AART) as of 63020
The recovery remains highly uncertain given the size and exogenous nature of
the COVID shock
Policy actions are playing a larger role in driving financial market performance than
in past cycles
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
ASSE
TM
ARKE
TS
EM Emerging Markets EMEA Europe the Middle East and Africa For indexes and other important information used to represent above asset categories see Appendix Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged Sector returns represented by SampP 500 sectors Sector investing involves risk Because of its narrow focus sector investing may be more volatile than investing in more diversified baskets of securities Source Bloomberg Finance LP Fidelity Investments (AART) as of 6302025
US Equity Styles Total ReturnInternational Equities and Global Assets Total Return
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
For illustrative purposes only Past performance is no guarantee of future results Diversification does not ensure a profit or guarantee against a loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Fidelity proprietary analysis based on Monte Carlo simulations using historical index returns Domestic Equity Dow Jones US Total Stock Market Index Foreign Equity MSCI ACWI ex USA Index Investment Grade (IG) Bonds Bloomberg Barclays US Aggregate Bond Index High Yield (HY) Bonds ICE BofA US High Yield Index Source Fidelity Investments Morningstar Bloomberg Barclays data as of 63020
-10
-5
0
5
10
15
20
25
Early Mid Late Recession
US Stocks IG Bonds Cash
Annualized Real ReturnAnnualized Nominal Return
75th
percentile
25th
percentile
Median
Asset Class Performance by Cycle Phase (1950ndash2018)
10-Year Portfolio Return Distribution by Cycle Phase Starting Point
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
ASSE
TM
ARKE
TS
-40
-30
-20
-10
0
10
20
30
40
Jun-
12
Sep-
12
Dec
-12
Mar
-13
Jun-
13
Sep-
13
Dec
-13
Mar
-14
Jun-
14
Sep-
14
Dec
-14
Mar
-15
Jun-
15
Sep-
15
Dec
-15
Mar
-16
Jun-
16
Sep-
16
Dec
-16
Mar
-17
Jun-
17
Sep-
17
Dec
-17
Mar
-18
Jun-
18
Sep-
18
Dec
-18
Mar
-19
Jun-
19
Sep-
19
Dec
-19
Mar
-20
Jun-
20
EM DM US
27Past performance is no guarantee of future results DM Developed Markets EM Emerging Markets EPS Earnings per share Forward EPS Next 12 months expectations Source MSCI Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Global EPS Growth (Trailing 12 Months)
Forward EPS
53
01-49
Percent
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
ASSE
TM
ARKE
TS
0
5
10
15
20
25
2005 2008 2011 2014 2017 2020
DM Trailing PE EM Trailing PE US Trailing PE Forward PE
28
DM Non-US Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Price-to-earnings ratio (PE) stock price divided by earnings per share Also known as the multiple PE gives investors an idea of how much they are paying for a companyrsquos earnings power Long-term average PE for Emerging Markets includes data for 1988ndash2017 for Non-US Developed Markets 1973ndash2016 for the United States 1926ndash2017 Indexes DMmdashMSCI EAFE Index EMmdashMSCI EM Index United StatesmdashSampP 500 Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
EM
US
DM
DM Long-Term Average
US Long-Term Average
EM Long-Term Average
Global Stock Market PE Ratios
Ratio
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
ASSE
TM
ARKE
TS
0
10
20
30
40
50
60
70
80
90
100
Rus
sia
Turk
eySp
ain
Sout
h Ko
rea
UK
Indo
nesi
aC
hina
Aust
ralia EM
Braz
ilIta
lyM
exic
oG
erm
any
Philip
pine
sD
MFr
ance
Can
ada
Japa
nIn
dia
US
-35
-30
-25
-20
-15
-10
-5
0
5
10
GBP JPY CAD EUR CNY
29
DM Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information LEFT Price-to-earnings (PE) ratio (or multiple) stock price divided by earnings per share which indicates how much investors are paying for a companyrsquos earnings power Cyclically adjusted earnings are 10-year averages adjusted for inflation Source FactSet countriesrsquo statistical organizations Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GBPmdashBritish pound JPYmdashJapanese yen CADmdashCanadian dollar EURmdasheuro CNYmdashChinese yuanSource Federal Reserve Board Haver Analytics Fidelity Investments (AART) as of 63020
53120 20-Year Range
Valuation of Real Exchange Rates
Expensive vs $
Cheap vs $
Shiller CAPE
Last 12-Month Range 63020
Cyclically Adjusted PEs Valuation of Major Currencies vs USD
Non-US Equity and Forex Valuations Relatively AttractiveCyclically adjusted PE (CAPE) ratios for international developed-market and emerging-market equities remained below US valuations providing a relatively favorable long-term backdrop for non-US stocks In Q2 the US dollar depreciated against many of the worldrsquos major currencies nevertheless US dollar valuations remain relatively expensive overall
ASSE
TM
ARKE
TS
LEFT TIPS Treasury Inflation-Protected Securities SOURCE Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Source CME Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 6302030
00
05
10
15
20
25
30
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
10 Year LT Average (Since 1998)
US Treasury Breakeven Inflation Rates
Yield
$0
$20
$40
$60
$80
$100
$120
$140
$160
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
WTI Crude Oil
Inflation Adjusted Price (March 2020 Dollars)
Real Oil Price
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
ASSE
TM
ARKE
TS
31
Past performance is no guarantee of future results Sectors as defined by GICS White line is a theoretical representation of the business cycle as it moves through early mid late and recession phases Green and red shaded portions above respectively represent over- or underperformance relative to the broader market unshaded (white) portions suggest no clear pattern of over- or underperformance Double +ndash signs indicate that the sector is showing a consistent signal across all three metrics full-phase average performance median monthly difference and cycle hit rate A single +ndash indicates a mixed or less consistent signal Return data from 1962 to 2016 Source Fidelity Investments (AART) as of 63020
Business-Cycle Approach to SectorsSector EARLY CYCLE
Economically sensitive sectors may tend to outperform while more defensive sectors have
tended to underperform
Making marginal portfolio allocation changes to manage
drawdown risk with sectorsmay enhance risk-adjusted
returns during this cycle
Defensive and inflation-resistantsectors tend to perform better
while more cyclical sectors underperform
Since performance is generally negative in
recessions investors should focus on the most defensive
historically stable sectors
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
ASSE
TM
ARKE
TS
400
420
440
460
480
500
520
540
092
094
096
098
100
102
104
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18D
ec-1
8M
ar-1
9Ju
n-19
Sep-
19D
ec-1
9M
ar-2
0Ju
n-20
Value vs Growth Performance CRB Raw Industrials Index
LEFT Gray bars represent US recessions as defined by NBER Asset classes represented by Value Fidelity Value ETF Growth Russell 1000reg
Growth Index Commodity Prices CRB Raw Industrials Index Source Federal Reserve Board NBER Haver Analytics Bloomberg Finance LP Fidelity Investments (AART) as of 63020 RIGHT Asset classes represented by Growth Russell 1000reg Growth Index Value Russell 1000reg Value Index Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020 Past performance is no guarantee of future results All indexes are unmanaged You cannot invest directly in an index Unlike mutual funds ETF shares are bought and sold at market price which may be higher or lower than their NAV and are not individually redeemed from the fund32
Value Equity More Attractive after Long UnderperformanceOn a cyclical basis the relative performance of value stocks has tended to correlate generally with the direction of the global economy and in particular with commodity prices which may be bottoming after the worldwide COVID-19 shutdown Meanwhile after a decade of trailing other leading factors and styles valuersquos relative valuations are at their most attractive in roughly 20 years
Price-to-Book Valuation SpreadsValue Relative Performance vs Commodity Prices
Ratio PB RatioIndex
0
1
2
3
4
5
6
7
8
9
10
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Growth vs Value
ASSE
TM
ARKE
TS
33
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Percentile ranks of yields and spreads based on historical period from 1993 to 2020 MBS mortgage-backed securities Source Bloomberg Barclays Bank of America Merrill Lynch JP Morgan Fidelity Investments (AART) as of 63020
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
Market Summary
SUM
MAR
Y
MACRO
4
bull Global economy displayed sequential improvement as the re-opening phase began
bull Dramatic rebound in riskier asset prices
ASSET MARKETS
Q2 2020
OUTLOOK bull The worst of the recession is behind but activity levels remain well below normal
bull US progress is tentative and uneven amid a pick-up in new virus cases
bull Chinarsquos recovery is ahead of the rest of the world particularly its industrial activity
bull The historic monetary and fiscal response remains supportive but fiscal drag is a risk
bull Policy actions address the near-term deflationary shock but they might presage a long-term regime shift
bull Policy decisions are likely to have an increasingly large influence on asset returns
bull Tentative signs of economic stabilization warrant a relatively neutral near-term asset allocation positioning
bull Elevated market volatility is expected to continue due to uncertainty about the virus and economic outlook
Diversification does not ensure a profit or guarantee against a loss
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
SUM
MAR
Y
-4
0
4
8
12
16
1946
1948
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
5
Q2 2020 () YTD () Q2 2020 () YTD ()
US Small Cap Stocks 254 -130 Real Estate Stocks 118 -187US Mid Cap Stocks 246 -91 Emerging-Market Bonds 112 -19US Large Cap Stocks 205 -31 High Yield Bonds 96 -48Non-US Small Cap Stocks 199 -131 US Corporate Bonds 82 48Emerging-Market Stocks 181 -98 Long Government amp Credit Bonds 62 128Non-US Developed-Country Stocks 149 -113 Commodities 51 -194Gold 129 174 Investment-Grade Bonds 29 61
20-Year US Stock Returns Minus IG Bond Returns since 1946Annualized Return Difference ()
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Assets represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market BondsmdashJP Morgan EMBI Global Index Emerging-Market StocksmdashMSCI EM Index GoldmdashGold Bullion LBMA PM Fix High-Yield BondsmdashICE BofA High Yield Bond Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Non-US Developed-Country StocksmdashMSCI EAFE Index Non-US Small Cap StocksmdashMSCI EAFE Small Cap Index Real Estate StocksmdashFTSE NAREIT Equity Index US Corporate BondsmdashBloomberg Barclays US Credit Index US Large Cap StocksmdashSampP 500reg index US Mid Cap StocksmdashRussell Midcapreg Index US Small Cap StocksmdashRussell 2000reg Index Long Government amp Credit BondsmdashBloomberg Barclays Long Government amp Credit Index Source Bloomberg Finance LP Haver Analytics Fidelity Investments Asset Allocation Research Team (AART) as of 63020
Average since 1946 5
07
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
SUM
MAR
Y
40
50
60
70
80
90
100
110
0 30 60 90 120 150 180 210 240 270 300 330 360
1960 1970 1973 1980 1981 1990 2001 2008 2020
6
Since the 1973 peak is not regained until after the 1980 recession the 1980 line starts at its near term high on 2201980 Index SampP 500reg Lines represent a 5 day moving average table uses daily values and 1973 recession not included in average for return to peak All indexes are unmanaged You cannot invest directly in an index Past performance is no guarantee of future results Source Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Stock Market Drawdowns during Recessions (19602020)
Days since Peak
Index Peak = 100
Average since 1960 2020Total Drawdown -33 -34Drawdown Length (Days) 340 23Drawdown through Recession End -20 -8 (63020)Days to Return to Peak 756
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
SUM
MAR
Y
$0
$1
$2
$3
$4
$5
$6
$7
May
-15
Nov
-15
May
-16
Nov
-16
May
-17
Nov
-17
May
-18
Nov
-18
May
-19
Nov
-19
May
-20
Transfer Receipts from Govt Personal Savings
LEFT Source Bureau of Economic Analysis Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT Source SIFMA Fidelity Investments (AART) as of 53120 7
$0
$200
$400
$600
$800
$1000
$1200
2015 2016 2017 2018 2019 2020
New Debt Issuance (JanndashMay)
Trillions Billions
Personal Savings and Government Stimulus Corporate Bond New Issuance
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
SUM
MAR
Y
-10
-05
00
05
10
15
20
25
30
35
40
Jun-
2010
Oct
-201
0
Feb-
2011
Jun-
2011
Oct
-201
1
Feb-
2012
Jun-
2012
Oct
-201
2
Feb-
2013
Jun-
2013
Oct
-201
3
Feb-
2014
Jun-
2014
Oct
-201
4
Feb-
2015
Jun-
2015
Oct
-201
5
Feb-
2016
Jun-
2016
Oct
-201
6
Feb-
2017
Jun-
2017
Oct
-201
7
Feb-
2018
Jun-
2018
Oct
-201
8
Feb-
2019
Jun-
2019
Oct
-201
9
Feb-
2020
Jun-
2020
Inflation Expectations Real Yields Nominal Yield
8
Yield
Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
ECO
NO
MY
10
DYNAMIC ASSET ALLOCATION TIMELINE
Business Cycle
(10ndash30 years)Secular
HORIZONS
(1ndash10 years)
Tactical(1ndash12 months)
Portfolio ConstructionAsset Class | CountryRegion | Sectors | Correlations
For illustrative purposes only Source Fidelity Investments (AART) as of 63020
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
ECO
NO
MY
11
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 A growth recession is a significant decline in activity relative to a countryrsquos long-term economic potential We use the ldquogrowth cyclerdquo definition for most developing economies such as China because they tend to exhibit strong trend performance driven by rapid factor accumulation and increases in productivity and the deviation from the trend tends to matter most for asset returns We use the classic definition of recession involving an outright contraction in economic activity for developed economies Source Fidelity Investments (AART) as of 63020
Business Cycle Framework
ChinaUS Eurozone UK Canada Australia
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
European energy demand is reflected by a five-day moving average of daily electric loads Chinese energy demand is reflected by a seven-day moving average of daily coal consumption and US energy demand is reflected by weekly electric output The distance from average for the US and Europe is calculated as the current yearrsquos data as a percentage above or below the 2017ndash2019 weekly average The distance from average for the China is calculated as the current yearrsquos data as a percentage above or below the 2017ndash2019 daily average indexed to the Chinese New Year GDP-weighted countries in Europe include Italy Germany United Kingdom Spain Austria and France Source CCTD European Network of Transmission System Operators for Electricity Edison Electric Institute Haver Analytics Fidelity Investments (AART) as of 62820 12
Distance from Average
High-Frequency Energy Demand
-12-9-2
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
ECO
NO
MY
25
30
35
40
45
50
55
60
65
70
75
0
10
20
30
40
50
60
70
80
90
100
Dec
-05
Sep-
06Ju
n-07
Mar
-08
Dec
-08
Oct
-09
Jul-1
0Ap
r-11
Jan-
12O
ct-1
2Au
g-13
May
-14
Feb-
15N
ov-1
5Au
g-16
Jun-
17M
ar-1
8D
ec-1
8Se
p-19
Jun-
20
AART Industrial Production Diffusion IndexPMI New Export Orders
PMI Purchasing Managers Index A reading above 50 indicates the manufacturing economy is generally expanding below 50 indicates it is generally contracting AART Industrial Production Diffusion Index is a proprietary index based on industrial production data Gray bars represent China growth recessions as defined by AART LEFT Source China National Bureau of Statistics Haver Analytics Fidelity Investments (AART) AART Diffusion Index as of 53120 PMI as of 6302020 RIGHT Index values above 100 denote optimism values below 100 denote pessimism and an index value of 100 denotes neutral sentiment Source China National Bureau of Statistics Haver Analytics Fidelity Investments (AART) as of 53120 13
China Industrial Activity China Consumer Confidence Index
90
95
100
105
110
115
120
125
130
Jun-
10
Jun-
11
Jun-
12
Jun-
13
Jun-
14
Jun-
15
Jun-
16
Jun-
17
Jun-
18
Jun-
19
Jun-
20
Consumer Confidence Index
Percent of Industries in Expansion Index Value 100 = Neutral SentimentPMI
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
ECO
NO
MY
LEFT Source Census Haver Analytics Fidelity Investments (AART) as of 62720 RIGHT Workers receiving unemployment insurance ldquoWith $250rdquo is if extra benefit is reduced to that level after expiration of $600 Worker income cohorts are defined by percentiles low Income (25th percentile) middle income (50th percentile) and high income (75th percentile) Working paper ldquoUS Unemployment Insurance Replacement Rates During the Pandemicrdquo by Ganong Noel and Vavra Fidelity Investments (AART) as of 53120 14
-60
-40
-20
0
20
40
60
80
100
LowIncome
MiddleIncome
HighIncome
With $600 CARES Benefit With $250
Percent Above or Below Normal Income
Weekly Earnings of Unemployed Individuals
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
0
001
002
003
004
005
006
007
008
009
01
0
1
2
3
4
5
6
7
Jun-
07
Jun-
08
Jun-
09
Jun-
10
Jun-
11
Jun-
12
Jun-
13
Jun-
14
Jun-
15
Jun-
16
Jun-
17
Jun-
18
Jun-
19
Jun-
20
Initial Claims
Millions
US Unemployment Claims
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Conference Board Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Other industries most impacted shaded in blue include For GDP Recreation Services Autos Transportation Services Recreation Goods Clothing Gasoline Furnishings For Employment Retail Transportation Source Conference Board NBER Haver Analytics Fidelity Investments (AART) as of 2292015
Restaurants and Hotels
Leisure and Hospitality
0
5
10
15
20
25
GDP Private Employment
Largest Affected Industry Other
Sectors Most Impacted by COVID-19
Share
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Consumer Sentiment
00
1
2
3
4
5
6
7
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
2020
Consumer ExpectationsPresent Situation
Ratio
ECO
NO
MY
ldquoFastrdquo reopening states include Arizona Florida Georgia and Texas ldquoSlowrdquo reopening states include Massachusetts New York and New Jersey LEFT Source Johns Hopkins University Haver Analytics Fidelity Investments (AART) as of 7320 RIGHT Baseline is defined as the median for that day of the week during the period 1420ndash13120 Source OpenTable Homebase Haver Analytics Fidelity Investments (AART) as of 62620
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
Hours Worked byEmployees
Local BusinessesOpen
OpenTableReservations YoY
April Trough 62620 61820
Cases (Five Day Moving Average)
New COVID-19 Cases Daily Data in ldquoFastrdquo Reopening States
Hours and Businesses (0 = Baseline) Year-Over-Year
16
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
0
1000
2000
3000
4000
5000
6000
7000
8000
33
203
102
03
172
03
242
03
312
04
720
414
20
421
20
428
20
55
205
122
05
192
05
262
06
220
69
206
162
06
232
06
302
0
Fast Reopening States Slow Reopening States
ECO
NO
MY
-30
-20
-10
0
10
20
30
Jun-19 Sep-19 Dec-19 Mar-20 Jun-20
2020 2021
40
50
60
70
80
90
100
110
120
-12 -9 -6 -3 0 3 6 9 12 15 18 21 24 27 30 33 36
Months (t=0 is start of recession)
Average since 1980 2007ndash20082020ndash22 Consensus Estimate
LEFT AND RIGHT EPS Earnings per share Past performance is no guarantee of future results Source Bloomberg Finance LP Fidelity Investments (AART) Haver Analytics as of 6252017
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
ECO
NO
MY
050
075
100
125
150
175
200
225
250
275
ClevelandFed
AtlantaFed
New YorkFed
CoreCPI
May-2020 Dec-2019
LEFT CPI Consumer Price Index Core CPI excludes Food and Energy Cleveland Fed Cleveland 16 Trimmed Mean CPI Atlanta Fed StickyCPI New York Fed Underlying Inflation Gauge Source Federal Reserve Board Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GFC Global Financial Crisis Inflation curves derived from Inflation swaps Source Bloomberg Financial Fidelity Investments (AART) as of 6302018
Measures of US Inflation
Year-Over-Year
050
075
100
125
150
175
200
225
250
275
1 2 3 4 5 6 7 8 9 10 20 30Years
Expected CPI Year-Over-Year
US Inflation Expectations
June 2010
June 2020
GFC
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Federal Reserve Board NBER Bureau of Economic Analysis Haver Analytics Fidelity Investments (AART) as of 33120 RIGHT The 50 of households with the lowest incomes Source Federal Reserve Board Bureau of Economic Analysis World Inequality Data Haver Analytics Fidelity Investments (AART) as of 12311819
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
0
0
0
0
0
0
0
0
0
0
0
70
75
80
85
90
95
100
105
1993 1996 1999 2002 2005 2008 2011 2014 2017 2020
Non-Financial Corporate CreditRevenues
12
13
14
15
16
17
18
19
20
21
300
350
400
450
500
550
600
1976 1981 1986 1991 1996 2001 2006 2011 2016
Financial Assets Bottom 50 Household Income
Household Financial Assets and Income
Share of Household Income
US Corporate Debt
Ratio Share of Disposable Income
ECO
NO
MY
-$1000
$0
$1000
$2000
$3000
$4000
$5000
May
-201
1
Nov
-201
1
May
-201
2
Nov
-201
2
May
-201
3
Nov
-201
3
May
-201
4
Nov
-201
4
May
-201
5
Nov
-201
5
May
-201
6
Nov
-201
6
May
-201
7
Nov
-201
7
May
-201
8
Nov
-201
8
May
-201
9
Nov
-201
9
May
-202
0
UK Japan Eurozone US Total
20
Billions (12-Month Change)
QE Quantitative Easing Source Federal Reserve Bank of Japan European Central Bank Bank of England Haver Analytics Fidelity Investments (AART) as of 53120
Central Bank Balance Sheets
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
ECO
NO
MY
-20
-15
-10
-5
0
5
10
-100
-075
-050
-025
000
025
050
075
100
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
State and Local Government Federal Government Federal Budget Deficit
Source CBO BEA Haver Analytics 2020 and 2021 Budget Deficits are CBO projections (httpswwwcbogovsystemfiles2020-0456344-CBO-presentationpdf ) Fidelity Investments (AART) 21
Percent of GDP
US Federal Fiscal Deficit and Government Impact on GDP
Contribution to GDP
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
ECO
NO
MY
22 Ag Agriculture FDI Foreign direct investment ADR American depositary receipt Source Fidelity Investments (AART) as of 63020
US-China Relationship
Geopolitical Rivalry
Trade
Industrial Policy Issuesbull IT sectorbull Health carebull Supply chains
Strategic Competition
Policy Tools of De-Globalization
Military Hegemony
in Asia
Economic Advantage in
Key Areas
Consumer and Other
Goods
Bilateral Flashpointsbull Hong Kongbull Detention campsbull Taiwanbull South China Sea
Policy Action Categories Example
TariffTrade Barriers Raise tariffs to reduce imports
Export and FDI Restrictions Curtail high-tech exports
Industrial Policies Mandate supply chainonshoring
ImmigrationHuman Mobility Tighter borders
Financial Restrictions Penalties
US sanctions tax policies
InfoData Restrictions Chinas firewall
Portfolio Investment Restrictions
US de-lists Chinese ADRs
Politicized Debt Action Selective US default
BroadEconomic
Investment
TariffsMarket Accessbull Phase 1 ag deal
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
ECO
NO
MY
Risks
23
Business Cycle
Asset Allocation Implications
US is in process of emerging from a brief but sharp recession
Policymakers providing abundant support to markets and economy
Emphasize focus on diversified anddisciplined investment strategies
Members hold a wide range of views but see opportunities within asset classes
Opportunities include non-US assets US small cap and value equities TIPS and gold
For illustrative purposes only Diversification does not ensure a profit or guarantee against a loss Source Fidelity Investments (AART) as of 63020
The recovery remains highly uncertain given the size and exogenous nature of
the COVID shock
Policy actions are playing a larger role in driving financial market performance than
in past cycles
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
ASSE
TM
ARKE
TS
EM Emerging Markets EMEA Europe the Middle East and Africa For indexes and other important information used to represent above asset categories see Appendix Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged Sector returns represented by SampP 500 sectors Sector investing involves risk Because of its narrow focus sector investing may be more volatile than investing in more diversified baskets of securities Source Bloomberg Finance LP Fidelity Investments (AART) as of 6302025
US Equity Styles Total ReturnInternational Equities and Global Assets Total Return
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
For illustrative purposes only Past performance is no guarantee of future results Diversification does not ensure a profit or guarantee against a loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Fidelity proprietary analysis based on Monte Carlo simulations using historical index returns Domestic Equity Dow Jones US Total Stock Market Index Foreign Equity MSCI ACWI ex USA Index Investment Grade (IG) Bonds Bloomberg Barclays US Aggregate Bond Index High Yield (HY) Bonds ICE BofA US High Yield Index Source Fidelity Investments Morningstar Bloomberg Barclays data as of 63020
-10
-5
0
5
10
15
20
25
Early Mid Late Recession
US Stocks IG Bonds Cash
Annualized Real ReturnAnnualized Nominal Return
75th
percentile
25th
percentile
Median
Asset Class Performance by Cycle Phase (1950ndash2018)
10-Year Portfolio Return Distribution by Cycle Phase Starting Point
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
ASSE
TM
ARKE
TS
-40
-30
-20
-10
0
10
20
30
40
Jun-
12
Sep-
12
Dec
-12
Mar
-13
Jun-
13
Sep-
13
Dec
-13
Mar
-14
Jun-
14
Sep-
14
Dec
-14
Mar
-15
Jun-
15
Sep-
15
Dec
-15
Mar
-16
Jun-
16
Sep-
16
Dec
-16
Mar
-17
Jun-
17
Sep-
17
Dec
-17
Mar
-18
Jun-
18
Sep-
18
Dec
-18
Mar
-19
Jun-
19
Sep-
19
Dec
-19
Mar
-20
Jun-
20
EM DM US
27Past performance is no guarantee of future results DM Developed Markets EM Emerging Markets EPS Earnings per share Forward EPS Next 12 months expectations Source MSCI Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Global EPS Growth (Trailing 12 Months)
Forward EPS
53
01-49
Percent
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
ASSE
TM
ARKE
TS
0
5
10
15
20
25
2005 2008 2011 2014 2017 2020
DM Trailing PE EM Trailing PE US Trailing PE Forward PE
28
DM Non-US Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Price-to-earnings ratio (PE) stock price divided by earnings per share Also known as the multiple PE gives investors an idea of how much they are paying for a companyrsquos earnings power Long-term average PE for Emerging Markets includes data for 1988ndash2017 for Non-US Developed Markets 1973ndash2016 for the United States 1926ndash2017 Indexes DMmdashMSCI EAFE Index EMmdashMSCI EM Index United StatesmdashSampP 500 Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
EM
US
DM
DM Long-Term Average
US Long-Term Average
EM Long-Term Average
Global Stock Market PE Ratios
Ratio
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
ASSE
TM
ARKE
TS
0
10
20
30
40
50
60
70
80
90
100
Rus
sia
Turk
eySp
ain
Sout
h Ko
rea
UK
Indo
nesi
aC
hina
Aust
ralia EM
Braz
ilIta
lyM
exic
oG
erm
any
Philip
pine
sD
MFr
ance
Can
ada
Japa
nIn
dia
US
-35
-30
-25
-20
-15
-10
-5
0
5
10
GBP JPY CAD EUR CNY
29
DM Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information LEFT Price-to-earnings (PE) ratio (or multiple) stock price divided by earnings per share which indicates how much investors are paying for a companyrsquos earnings power Cyclically adjusted earnings are 10-year averages adjusted for inflation Source FactSet countriesrsquo statistical organizations Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GBPmdashBritish pound JPYmdashJapanese yen CADmdashCanadian dollar EURmdasheuro CNYmdashChinese yuanSource Federal Reserve Board Haver Analytics Fidelity Investments (AART) as of 63020
53120 20-Year Range
Valuation of Real Exchange Rates
Expensive vs $
Cheap vs $
Shiller CAPE
Last 12-Month Range 63020
Cyclically Adjusted PEs Valuation of Major Currencies vs USD
Non-US Equity and Forex Valuations Relatively AttractiveCyclically adjusted PE (CAPE) ratios for international developed-market and emerging-market equities remained below US valuations providing a relatively favorable long-term backdrop for non-US stocks In Q2 the US dollar depreciated against many of the worldrsquos major currencies nevertheless US dollar valuations remain relatively expensive overall
ASSE
TM
ARKE
TS
LEFT TIPS Treasury Inflation-Protected Securities SOURCE Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Source CME Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 6302030
00
05
10
15
20
25
30
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
10 Year LT Average (Since 1998)
US Treasury Breakeven Inflation Rates
Yield
$0
$20
$40
$60
$80
$100
$120
$140
$160
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
WTI Crude Oil
Inflation Adjusted Price (March 2020 Dollars)
Real Oil Price
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
ASSE
TM
ARKE
TS
31
Past performance is no guarantee of future results Sectors as defined by GICS White line is a theoretical representation of the business cycle as it moves through early mid late and recession phases Green and red shaded portions above respectively represent over- or underperformance relative to the broader market unshaded (white) portions suggest no clear pattern of over- or underperformance Double +ndash signs indicate that the sector is showing a consistent signal across all three metrics full-phase average performance median monthly difference and cycle hit rate A single +ndash indicates a mixed or less consistent signal Return data from 1962 to 2016 Source Fidelity Investments (AART) as of 63020
Business-Cycle Approach to SectorsSector EARLY CYCLE
Economically sensitive sectors may tend to outperform while more defensive sectors have
tended to underperform
Making marginal portfolio allocation changes to manage
drawdown risk with sectorsmay enhance risk-adjusted
returns during this cycle
Defensive and inflation-resistantsectors tend to perform better
while more cyclical sectors underperform
Since performance is generally negative in
recessions investors should focus on the most defensive
historically stable sectors
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
ASSE
TM
ARKE
TS
400
420
440
460
480
500
520
540
092
094
096
098
100
102
104
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18D
ec-1
8M
ar-1
9Ju
n-19
Sep-
19D
ec-1
9M
ar-2
0Ju
n-20
Value vs Growth Performance CRB Raw Industrials Index
LEFT Gray bars represent US recessions as defined by NBER Asset classes represented by Value Fidelity Value ETF Growth Russell 1000reg
Growth Index Commodity Prices CRB Raw Industrials Index Source Federal Reserve Board NBER Haver Analytics Bloomberg Finance LP Fidelity Investments (AART) as of 63020 RIGHT Asset classes represented by Growth Russell 1000reg Growth Index Value Russell 1000reg Value Index Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020 Past performance is no guarantee of future results All indexes are unmanaged You cannot invest directly in an index Unlike mutual funds ETF shares are bought and sold at market price which may be higher or lower than their NAV and are not individually redeemed from the fund32
Value Equity More Attractive after Long UnderperformanceOn a cyclical basis the relative performance of value stocks has tended to correlate generally with the direction of the global economy and in particular with commodity prices which may be bottoming after the worldwide COVID-19 shutdown Meanwhile after a decade of trailing other leading factors and styles valuersquos relative valuations are at their most attractive in roughly 20 years
Price-to-Book Valuation SpreadsValue Relative Performance vs Commodity Prices
Ratio PB RatioIndex
0
1
2
3
4
5
6
7
8
9
10
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Growth vs Value
ASSE
TM
ARKE
TS
33
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Percentile ranks of yields and spreads based on historical period from 1993 to 2020 MBS mortgage-backed securities Source Bloomberg Barclays Bank of America Merrill Lynch JP Morgan Fidelity Investments (AART) as of 63020
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
SUM
MAR
Y
MACRO
4
bull Global economy displayed sequential improvement as the re-opening phase began
bull Dramatic rebound in riskier asset prices
ASSET MARKETS
Q2 2020
OUTLOOK bull The worst of the recession is behind but activity levels remain well below normal
bull US progress is tentative and uneven amid a pick-up in new virus cases
bull Chinarsquos recovery is ahead of the rest of the world particularly its industrial activity
bull The historic monetary and fiscal response remains supportive but fiscal drag is a risk
bull Policy actions address the near-term deflationary shock but they might presage a long-term regime shift
bull Policy decisions are likely to have an increasingly large influence on asset returns
bull Tentative signs of economic stabilization warrant a relatively neutral near-term asset allocation positioning
bull Elevated market volatility is expected to continue due to uncertainty about the virus and economic outlook
Diversification does not ensure a profit or guarantee against a loss
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
SUM
MAR
Y
-4
0
4
8
12
16
1946
1948
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
5
Q2 2020 () YTD () Q2 2020 () YTD ()
US Small Cap Stocks 254 -130 Real Estate Stocks 118 -187US Mid Cap Stocks 246 -91 Emerging-Market Bonds 112 -19US Large Cap Stocks 205 -31 High Yield Bonds 96 -48Non-US Small Cap Stocks 199 -131 US Corporate Bonds 82 48Emerging-Market Stocks 181 -98 Long Government amp Credit Bonds 62 128Non-US Developed-Country Stocks 149 -113 Commodities 51 -194Gold 129 174 Investment-Grade Bonds 29 61
20-Year US Stock Returns Minus IG Bond Returns since 1946Annualized Return Difference ()
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Assets represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market BondsmdashJP Morgan EMBI Global Index Emerging-Market StocksmdashMSCI EM Index GoldmdashGold Bullion LBMA PM Fix High-Yield BondsmdashICE BofA High Yield Bond Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Non-US Developed-Country StocksmdashMSCI EAFE Index Non-US Small Cap StocksmdashMSCI EAFE Small Cap Index Real Estate StocksmdashFTSE NAREIT Equity Index US Corporate BondsmdashBloomberg Barclays US Credit Index US Large Cap StocksmdashSampP 500reg index US Mid Cap StocksmdashRussell Midcapreg Index US Small Cap StocksmdashRussell 2000reg Index Long Government amp Credit BondsmdashBloomberg Barclays Long Government amp Credit Index Source Bloomberg Finance LP Haver Analytics Fidelity Investments Asset Allocation Research Team (AART) as of 63020
Average since 1946 5
07
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
SUM
MAR
Y
40
50
60
70
80
90
100
110
0 30 60 90 120 150 180 210 240 270 300 330 360
1960 1970 1973 1980 1981 1990 2001 2008 2020
6
Since the 1973 peak is not regained until after the 1980 recession the 1980 line starts at its near term high on 2201980 Index SampP 500reg Lines represent a 5 day moving average table uses daily values and 1973 recession not included in average for return to peak All indexes are unmanaged You cannot invest directly in an index Past performance is no guarantee of future results Source Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Stock Market Drawdowns during Recessions (19602020)
Days since Peak
Index Peak = 100
Average since 1960 2020Total Drawdown -33 -34Drawdown Length (Days) 340 23Drawdown through Recession End -20 -8 (63020)Days to Return to Peak 756
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
SUM
MAR
Y
$0
$1
$2
$3
$4
$5
$6
$7
May
-15
Nov
-15
May
-16
Nov
-16
May
-17
Nov
-17
May
-18
Nov
-18
May
-19
Nov
-19
May
-20
Transfer Receipts from Govt Personal Savings
LEFT Source Bureau of Economic Analysis Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT Source SIFMA Fidelity Investments (AART) as of 53120 7
$0
$200
$400
$600
$800
$1000
$1200
2015 2016 2017 2018 2019 2020
New Debt Issuance (JanndashMay)
Trillions Billions
Personal Savings and Government Stimulus Corporate Bond New Issuance
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
SUM
MAR
Y
-10
-05
00
05
10
15
20
25
30
35
40
Jun-
2010
Oct
-201
0
Feb-
2011
Jun-
2011
Oct
-201
1
Feb-
2012
Jun-
2012
Oct
-201
2
Feb-
2013
Jun-
2013
Oct
-201
3
Feb-
2014
Jun-
2014
Oct
-201
4
Feb-
2015
Jun-
2015
Oct
-201
5
Feb-
2016
Jun-
2016
Oct
-201
6
Feb-
2017
Jun-
2017
Oct
-201
7
Feb-
2018
Jun-
2018
Oct
-201
8
Feb-
2019
Jun-
2019
Oct
-201
9
Feb-
2020
Jun-
2020
Inflation Expectations Real Yields Nominal Yield
8
Yield
Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
ECO
NO
MY
10
DYNAMIC ASSET ALLOCATION TIMELINE
Business Cycle
(10ndash30 years)Secular
HORIZONS
(1ndash10 years)
Tactical(1ndash12 months)
Portfolio ConstructionAsset Class | CountryRegion | Sectors | Correlations
For illustrative purposes only Source Fidelity Investments (AART) as of 63020
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
ECO
NO
MY
11
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 A growth recession is a significant decline in activity relative to a countryrsquos long-term economic potential We use the ldquogrowth cyclerdquo definition for most developing economies such as China because they tend to exhibit strong trend performance driven by rapid factor accumulation and increases in productivity and the deviation from the trend tends to matter most for asset returns We use the classic definition of recession involving an outright contraction in economic activity for developed economies Source Fidelity Investments (AART) as of 63020
Business Cycle Framework
ChinaUS Eurozone UK Canada Australia
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
European energy demand is reflected by a five-day moving average of daily electric loads Chinese energy demand is reflected by a seven-day moving average of daily coal consumption and US energy demand is reflected by weekly electric output The distance from average for the US and Europe is calculated as the current yearrsquos data as a percentage above or below the 2017ndash2019 weekly average The distance from average for the China is calculated as the current yearrsquos data as a percentage above or below the 2017ndash2019 daily average indexed to the Chinese New Year GDP-weighted countries in Europe include Italy Germany United Kingdom Spain Austria and France Source CCTD European Network of Transmission System Operators for Electricity Edison Electric Institute Haver Analytics Fidelity Investments (AART) as of 62820 12
Distance from Average
High-Frequency Energy Demand
-12-9-2
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
ECO
NO
MY
25
30
35
40
45
50
55
60
65
70
75
0
10
20
30
40
50
60
70
80
90
100
Dec
-05
Sep-
06Ju
n-07
Mar
-08
Dec
-08
Oct
-09
Jul-1
0Ap
r-11
Jan-
12O
ct-1
2Au
g-13
May
-14
Feb-
15N
ov-1
5Au
g-16
Jun-
17M
ar-1
8D
ec-1
8Se
p-19
Jun-
20
AART Industrial Production Diffusion IndexPMI New Export Orders
PMI Purchasing Managers Index A reading above 50 indicates the manufacturing economy is generally expanding below 50 indicates it is generally contracting AART Industrial Production Diffusion Index is a proprietary index based on industrial production data Gray bars represent China growth recessions as defined by AART LEFT Source China National Bureau of Statistics Haver Analytics Fidelity Investments (AART) AART Diffusion Index as of 53120 PMI as of 6302020 RIGHT Index values above 100 denote optimism values below 100 denote pessimism and an index value of 100 denotes neutral sentiment Source China National Bureau of Statistics Haver Analytics Fidelity Investments (AART) as of 53120 13
China Industrial Activity China Consumer Confidence Index
90
95
100
105
110
115
120
125
130
Jun-
10
Jun-
11
Jun-
12
Jun-
13
Jun-
14
Jun-
15
Jun-
16
Jun-
17
Jun-
18
Jun-
19
Jun-
20
Consumer Confidence Index
Percent of Industries in Expansion Index Value 100 = Neutral SentimentPMI
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
ECO
NO
MY
LEFT Source Census Haver Analytics Fidelity Investments (AART) as of 62720 RIGHT Workers receiving unemployment insurance ldquoWith $250rdquo is if extra benefit is reduced to that level after expiration of $600 Worker income cohorts are defined by percentiles low Income (25th percentile) middle income (50th percentile) and high income (75th percentile) Working paper ldquoUS Unemployment Insurance Replacement Rates During the Pandemicrdquo by Ganong Noel and Vavra Fidelity Investments (AART) as of 53120 14
-60
-40
-20
0
20
40
60
80
100
LowIncome
MiddleIncome
HighIncome
With $600 CARES Benefit With $250
Percent Above or Below Normal Income
Weekly Earnings of Unemployed Individuals
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
0
001
002
003
004
005
006
007
008
009
01
0
1
2
3
4
5
6
7
Jun-
07
Jun-
08
Jun-
09
Jun-
10
Jun-
11
Jun-
12
Jun-
13
Jun-
14
Jun-
15
Jun-
16
Jun-
17
Jun-
18
Jun-
19
Jun-
20
Initial Claims
Millions
US Unemployment Claims
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Conference Board Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Other industries most impacted shaded in blue include For GDP Recreation Services Autos Transportation Services Recreation Goods Clothing Gasoline Furnishings For Employment Retail Transportation Source Conference Board NBER Haver Analytics Fidelity Investments (AART) as of 2292015
Restaurants and Hotels
Leisure and Hospitality
0
5
10
15
20
25
GDP Private Employment
Largest Affected Industry Other
Sectors Most Impacted by COVID-19
Share
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Consumer Sentiment
00
1
2
3
4
5
6
7
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
2020
Consumer ExpectationsPresent Situation
Ratio
ECO
NO
MY
ldquoFastrdquo reopening states include Arizona Florida Georgia and Texas ldquoSlowrdquo reopening states include Massachusetts New York and New Jersey LEFT Source Johns Hopkins University Haver Analytics Fidelity Investments (AART) as of 7320 RIGHT Baseline is defined as the median for that day of the week during the period 1420ndash13120 Source OpenTable Homebase Haver Analytics Fidelity Investments (AART) as of 62620
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
Hours Worked byEmployees
Local BusinessesOpen
OpenTableReservations YoY
April Trough 62620 61820
Cases (Five Day Moving Average)
New COVID-19 Cases Daily Data in ldquoFastrdquo Reopening States
Hours and Businesses (0 = Baseline) Year-Over-Year
16
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
0
1000
2000
3000
4000
5000
6000
7000
8000
33
203
102
03
172
03
242
03
312
04
720
414
20
421
20
428
20
55
205
122
05
192
05
262
06
220
69
206
162
06
232
06
302
0
Fast Reopening States Slow Reopening States
ECO
NO
MY
-30
-20
-10
0
10
20
30
Jun-19 Sep-19 Dec-19 Mar-20 Jun-20
2020 2021
40
50
60
70
80
90
100
110
120
-12 -9 -6 -3 0 3 6 9 12 15 18 21 24 27 30 33 36
Months (t=0 is start of recession)
Average since 1980 2007ndash20082020ndash22 Consensus Estimate
LEFT AND RIGHT EPS Earnings per share Past performance is no guarantee of future results Source Bloomberg Finance LP Fidelity Investments (AART) Haver Analytics as of 6252017
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
ECO
NO
MY
050
075
100
125
150
175
200
225
250
275
ClevelandFed
AtlantaFed
New YorkFed
CoreCPI
May-2020 Dec-2019
LEFT CPI Consumer Price Index Core CPI excludes Food and Energy Cleveland Fed Cleveland 16 Trimmed Mean CPI Atlanta Fed StickyCPI New York Fed Underlying Inflation Gauge Source Federal Reserve Board Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GFC Global Financial Crisis Inflation curves derived from Inflation swaps Source Bloomberg Financial Fidelity Investments (AART) as of 6302018
Measures of US Inflation
Year-Over-Year
050
075
100
125
150
175
200
225
250
275
1 2 3 4 5 6 7 8 9 10 20 30Years
Expected CPI Year-Over-Year
US Inflation Expectations
June 2010
June 2020
GFC
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Federal Reserve Board NBER Bureau of Economic Analysis Haver Analytics Fidelity Investments (AART) as of 33120 RIGHT The 50 of households with the lowest incomes Source Federal Reserve Board Bureau of Economic Analysis World Inequality Data Haver Analytics Fidelity Investments (AART) as of 12311819
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
0
0
0
0
0
0
0
0
0
0
0
70
75
80
85
90
95
100
105
1993 1996 1999 2002 2005 2008 2011 2014 2017 2020
Non-Financial Corporate CreditRevenues
12
13
14
15
16
17
18
19
20
21
300
350
400
450
500
550
600
1976 1981 1986 1991 1996 2001 2006 2011 2016
Financial Assets Bottom 50 Household Income
Household Financial Assets and Income
Share of Household Income
US Corporate Debt
Ratio Share of Disposable Income
ECO
NO
MY
-$1000
$0
$1000
$2000
$3000
$4000
$5000
May
-201
1
Nov
-201
1
May
-201
2
Nov
-201
2
May
-201
3
Nov
-201
3
May
-201
4
Nov
-201
4
May
-201
5
Nov
-201
5
May
-201
6
Nov
-201
6
May
-201
7
Nov
-201
7
May
-201
8
Nov
-201
8
May
-201
9
Nov
-201
9
May
-202
0
UK Japan Eurozone US Total
20
Billions (12-Month Change)
QE Quantitative Easing Source Federal Reserve Bank of Japan European Central Bank Bank of England Haver Analytics Fidelity Investments (AART) as of 53120
Central Bank Balance Sheets
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
ECO
NO
MY
-20
-15
-10
-5
0
5
10
-100
-075
-050
-025
000
025
050
075
100
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
State and Local Government Federal Government Federal Budget Deficit
Source CBO BEA Haver Analytics 2020 and 2021 Budget Deficits are CBO projections (httpswwwcbogovsystemfiles2020-0456344-CBO-presentationpdf ) Fidelity Investments (AART) 21
Percent of GDP
US Federal Fiscal Deficit and Government Impact on GDP
Contribution to GDP
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
ECO
NO
MY
22 Ag Agriculture FDI Foreign direct investment ADR American depositary receipt Source Fidelity Investments (AART) as of 63020
US-China Relationship
Geopolitical Rivalry
Trade
Industrial Policy Issuesbull IT sectorbull Health carebull Supply chains
Strategic Competition
Policy Tools of De-Globalization
Military Hegemony
in Asia
Economic Advantage in
Key Areas
Consumer and Other
Goods
Bilateral Flashpointsbull Hong Kongbull Detention campsbull Taiwanbull South China Sea
Policy Action Categories Example
TariffTrade Barriers Raise tariffs to reduce imports
Export and FDI Restrictions Curtail high-tech exports
Industrial Policies Mandate supply chainonshoring
ImmigrationHuman Mobility Tighter borders
Financial Restrictions Penalties
US sanctions tax policies
InfoData Restrictions Chinas firewall
Portfolio Investment Restrictions
US de-lists Chinese ADRs
Politicized Debt Action Selective US default
BroadEconomic
Investment
TariffsMarket Accessbull Phase 1 ag deal
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
ECO
NO
MY
Risks
23
Business Cycle
Asset Allocation Implications
US is in process of emerging from a brief but sharp recession
Policymakers providing abundant support to markets and economy
Emphasize focus on diversified anddisciplined investment strategies
Members hold a wide range of views but see opportunities within asset classes
Opportunities include non-US assets US small cap and value equities TIPS and gold
For illustrative purposes only Diversification does not ensure a profit or guarantee against a loss Source Fidelity Investments (AART) as of 63020
The recovery remains highly uncertain given the size and exogenous nature of
the COVID shock
Policy actions are playing a larger role in driving financial market performance than
in past cycles
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
ASSE
TM
ARKE
TS
EM Emerging Markets EMEA Europe the Middle East and Africa For indexes and other important information used to represent above asset categories see Appendix Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged Sector returns represented by SampP 500 sectors Sector investing involves risk Because of its narrow focus sector investing may be more volatile than investing in more diversified baskets of securities Source Bloomberg Finance LP Fidelity Investments (AART) as of 6302025
US Equity Styles Total ReturnInternational Equities and Global Assets Total Return
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
For illustrative purposes only Past performance is no guarantee of future results Diversification does not ensure a profit or guarantee against a loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Fidelity proprietary analysis based on Monte Carlo simulations using historical index returns Domestic Equity Dow Jones US Total Stock Market Index Foreign Equity MSCI ACWI ex USA Index Investment Grade (IG) Bonds Bloomberg Barclays US Aggregate Bond Index High Yield (HY) Bonds ICE BofA US High Yield Index Source Fidelity Investments Morningstar Bloomberg Barclays data as of 63020
-10
-5
0
5
10
15
20
25
Early Mid Late Recession
US Stocks IG Bonds Cash
Annualized Real ReturnAnnualized Nominal Return
75th
percentile
25th
percentile
Median
Asset Class Performance by Cycle Phase (1950ndash2018)
10-Year Portfolio Return Distribution by Cycle Phase Starting Point
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
ASSE
TM
ARKE
TS
-40
-30
-20
-10
0
10
20
30
40
Jun-
12
Sep-
12
Dec
-12
Mar
-13
Jun-
13
Sep-
13
Dec
-13
Mar
-14
Jun-
14
Sep-
14
Dec
-14
Mar
-15
Jun-
15
Sep-
15
Dec
-15
Mar
-16
Jun-
16
Sep-
16
Dec
-16
Mar
-17
Jun-
17
Sep-
17
Dec
-17
Mar
-18
Jun-
18
Sep-
18
Dec
-18
Mar
-19
Jun-
19
Sep-
19
Dec
-19
Mar
-20
Jun-
20
EM DM US
27Past performance is no guarantee of future results DM Developed Markets EM Emerging Markets EPS Earnings per share Forward EPS Next 12 months expectations Source MSCI Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Global EPS Growth (Trailing 12 Months)
Forward EPS
53
01-49
Percent
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
ASSE
TM
ARKE
TS
0
5
10
15
20
25
2005 2008 2011 2014 2017 2020
DM Trailing PE EM Trailing PE US Trailing PE Forward PE
28
DM Non-US Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Price-to-earnings ratio (PE) stock price divided by earnings per share Also known as the multiple PE gives investors an idea of how much they are paying for a companyrsquos earnings power Long-term average PE for Emerging Markets includes data for 1988ndash2017 for Non-US Developed Markets 1973ndash2016 for the United States 1926ndash2017 Indexes DMmdashMSCI EAFE Index EMmdashMSCI EM Index United StatesmdashSampP 500 Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
EM
US
DM
DM Long-Term Average
US Long-Term Average
EM Long-Term Average
Global Stock Market PE Ratios
Ratio
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
ASSE
TM
ARKE
TS
0
10
20
30
40
50
60
70
80
90
100
Rus
sia
Turk
eySp
ain
Sout
h Ko
rea
UK
Indo
nesi
aC
hina
Aust
ralia EM
Braz
ilIta
lyM
exic
oG
erm
any
Philip
pine
sD
MFr
ance
Can
ada
Japa
nIn
dia
US
-35
-30
-25
-20
-15
-10
-5
0
5
10
GBP JPY CAD EUR CNY
29
DM Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information LEFT Price-to-earnings (PE) ratio (or multiple) stock price divided by earnings per share which indicates how much investors are paying for a companyrsquos earnings power Cyclically adjusted earnings are 10-year averages adjusted for inflation Source FactSet countriesrsquo statistical organizations Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GBPmdashBritish pound JPYmdashJapanese yen CADmdashCanadian dollar EURmdasheuro CNYmdashChinese yuanSource Federal Reserve Board Haver Analytics Fidelity Investments (AART) as of 63020
53120 20-Year Range
Valuation of Real Exchange Rates
Expensive vs $
Cheap vs $
Shiller CAPE
Last 12-Month Range 63020
Cyclically Adjusted PEs Valuation of Major Currencies vs USD
Non-US Equity and Forex Valuations Relatively AttractiveCyclically adjusted PE (CAPE) ratios for international developed-market and emerging-market equities remained below US valuations providing a relatively favorable long-term backdrop for non-US stocks In Q2 the US dollar depreciated against many of the worldrsquos major currencies nevertheless US dollar valuations remain relatively expensive overall
ASSE
TM
ARKE
TS
LEFT TIPS Treasury Inflation-Protected Securities SOURCE Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Source CME Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 6302030
00
05
10
15
20
25
30
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
10 Year LT Average (Since 1998)
US Treasury Breakeven Inflation Rates
Yield
$0
$20
$40
$60
$80
$100
$120
$140
$160
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
WTI Crude Oil
Inflation Adjusted Price (March 2020 Dollars)
Real Oil Price
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
ASSE
TM
ARKE
TS
31
Past performance is no guarantee of future results Sectors as defined by GICS White line is a theoretical representation of the business cycle as it moves through early mid late and recession phases Green and red shaded portions above respectively represent over- or underperformance relative to the broader market unshaded (white) portions suggest no clear pattern of over- or underperformance Double +ndash signs indicate that the sector is showing a consistent signal across all three metrics full-phase average performance median monthly difference and cycle hit rate A single +ndash indicates a mixed or less consistent signal Return data from 1962 to 2016 Source Fidelity Investments (AART) as of 63020
Business-Cycle Approach to SectorsSector EARLY CYCLE
Economically sensitive sectors may tend to outperform while more defensive sectors have
tended to underperform
Making marginal portfolio allocation changes to manage
drawdown risk with sectorsmay enhance risk-adjusted
returns during this cycle
Defensive and inflation-resistantsectors tend to perform better
while more cyclical sectors underperform
Since performance is generally negative in
recessions investors should focus on the most defensive
historically stable sectors
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
ASSE
TM
ARKE
TS
400
420
440
460
480
500
520
540
092
094
096
098
100
102
104
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18D
ec-1
8M
ar-1
9Ju
n-19
Sep-
19D
ec-1
9M
ar-2
0Ju
n-20
Value vs Growth Performance CRB Raw Industrials Index
LEFT Gray bars represent US recessions as defined by NBER Asset classes represented by Value Fidelity Value ETF Growth Russell 1000reg
Growth Index Commodity Prices CRB Raw Industrials Index Source Federal Reserve Board NBER Haver Analytics Bloomberg Finance LP Fidelity Investments (AART) as of 63020 RIGHT Asset classes represented by Growth Russell 1000reg Growth Index Value Russell 1000reg Value Index Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020 Past performance is no guarantee of future results All indexes are unmanaged You cannot invest directly in an index Unlike mutual funds ETF shares are bought and sold at market price which may be higher or lower than their NAV and are not individually redeemed from the fund32
Value Equity More Attractive after Long UnderperformanceOn a cyclical basis the relative performance of value stocks has tended to correlate generally with the direction of the global economy and in particular with commodity prices which may be bottoming after the worldwide COVID-19 shutdown Meanwhile after a decade of trailing other leading factors and styles valuersquos relative valuations are at their most attractive in roughly 20 years
Price-to-Book Valuation SpreadsValue Relative Performance vs Commodity Prices
Ratio PB RatioIndex
0
1
2
3
4
5
6
7
8
9
10
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Growth vs Value
ASSE
TM
ARKE
TS
33
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Percentile ranks of yields and spreads based on historical period from 1993 to 2020 MBS mortgage-backed securities Source Bloomberg Barclays Bank of America Merrill Lynch JP Morgan Fidelity Investments (AART) as of 63020
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
SUM
MAR
Y
-4
0
4
8
12
16
1946
1948
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
5
Q2 2020 () YTD () Q2 2020 () YTD ()
US Small Cap Stocks 254 -130 Real Estate Stocks 118 -187US Mid Cap Stocks 246 -91 Emerging-Market Bonds 112 -19US Large Cap Stocks 205 -31 High Yield Bonds 96 -48Non-US Small Cap Stocks 199 -131 US Corporate Bonds 82 48Emerging-Market Stocks 181 -98 Long Government amp Credit Bonds 62 128Non-US Developed-Country Stocks 149 -113 Commodities 51 -194Gold 129 174 Investment-Grade Bonds 29 61
20-Year US Stock Returns Minus IG Bond Returns since 1946Annualized Return Difference ()
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Assets represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market BondsmdashJP Morgan EMBI Global Index Emerging-Market StocksmdashMSCI EM Index GoldmdashGold Bullion LBMA PM Fix High-Yield BondsmdashICE BofA High Yield Bond Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Non-US Developed-Country StocksmdashMSCI EAFE Index Non-US Small Cap StocksmdashMSCI EAFE Small Cap Index Real Estate StocksmdashFTSE NAREIT Equity Index US Corporate BondsmdashBloomberg Barclays US Credit Index US Large Cap StocksmdashSampP 500reg index US Mid Cap StocksmdashRussell Midcapreg Index US Small Cap StocksmdashRussell 2000reg Index Long Government amp Credit BondsmdashBloomberg Barclays Long Government amp Credit Index Source Bloomberg Finance LP Haver Analytics Fidelity Investments Asset Allocation Research Team (AART) as of 63020
Average since 1946 5
07
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
SUM
MAR
Y
40
50
60
70
80
90
100
110
0 30 60 90 120 150 180 210 240 270 300 330 360
1960 1970 1973 1980 1981 1990 2001 2008 2020
6
Since the 1973 peak is not regained until after the 1980 recession the 1980 line starts at its near term high on 2201980 Index SampP 500reg Lines represent a 5 day moving average table uses daily values and 1973 recession not included in average for return to peak All indexes are unmanaged You cannot invest directly in an index Past performance is no guarantee of future results Source Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Stock Market Drawdowns during Recessions (19602020)
Days since Peak
Index Peak = 100
Average since 1960 2020Total Drawdown -33 -34Drawdown Length (Days) 340 23Drawdown through Recession End -20 -8 (63020)Days to Return to Peak 756
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
SUM
MAR
Y
$0
$1
$2
$3
$4
$5
$6
$7
May
-15
Nov
-15
May
-16
Nov
-16
May
-17
Nov
-17
May
-18
Nov
-18
May
-19
Nov
-19
May
-20
Transfer Receipts from Govt Personal Savings
LEFT Source Bureau of Economic Analysis Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT Source SIFMA Fidelity Investments (AART) as of 53120 7
$0
$200
$400
$600
$800
$1000
$1200
2015 2016 2017 2018 2019 2020
New Debt Issuance (JanndashMay)
Trillions Billions
Personal Savings and Government Stimulus Corporate Bond New Issuance
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
SUM
MAR
Y
-10
-05
00
05
10
15
20
25
30
35
40
Jun-
2010
Oct
-201
0
Feb-
2011
Jun-
2011
Oct
-201
1
Feb-
2012
Jun-
2012
Oct
-201
2
Feb-
2013
Jun-
2013
Oct
-201
3
Feb-
2014
Jun-
2014
Oct
-201
4
Feb-
2015
Jun-
2015
Oct
-201
5
Feb-
2016
Jun-
2016
Oct
-201
6
Feb-
2017
Jun-
2017
Oct
-201
7
Feb-
2018
Jun-
2018
Oct
-201
8
Feb-
2019
Jun-
2019
Oct
-201
9
Feb-
2020
Jun-
2020
Inflation Expectations Real Yields Nominal Yield
8
Yield
Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
ECO
NO
MY
10
DYNAMIC ASSET ALLOCATION TIMELINE
Business Cycle
(10ndash30 years)Secular
HORIZONS
(1ndash10 years)
Tactical(1ndash12 months)
Portfolio ConstructionAsset Class | CountryRegion | Sectors | Correlations
For illustrative purposes only Source Fidelity Investments (AART) as of 63020
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
ECO
NO
MY
11
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 A growth recession is a significant decline in activity relative to a countryrsquos long-term economic potential We use the ldquogrowth cyclerdquo definition for most developing economies such as China because they tend to exhibit strong trend performance driven by rapid factor accumulation and increases in productivity and the deviation from the trend tends to matter most for asset returns We use the classic definition of recession involving an outright contraction in economic activity for developed economies Source Fidelity Investments (AART) as of 63020
Business Cycle Framework
ChinaUS Eurozone UK Canada Australia
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
European energy demand is reflected by a five-day moving average of daily electric loads Chinese energy demand is reflected by a seven-day moving average of daily coal consumption and US energy demand is reflected by weekly electric output The distance from average for the US and Europe is calculated as the current yearrsquos data as a percentage above or below the 2017ndash2019 weekly average The distance from average for the China is calculated as the current yearrsquos data as a percentage above or below the 2017ndash2019 daily average indexed to the Chinese New Year GDP-weighted countries in Europe include Italy Germany United Kingdom Spain Austria and France Source CCTD European Network of Transmission System Operators for Electricity Edison Electric Institute Haver Analytics Fidelity Investments (AART) as of 62820 12
Distance from Average
High-Frequency Energy Demand
-12-9-2
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
ECO
NO
MY
25
30
35
40
45
50
55
60
65
70
75
0
10
20
30
40
50
60
70
80
90
100
Dec
-05
Sep-
06Ju
n-07
Mar
-08
Dec
-08
Oct
-09
Jul-1
0Ap
r-11
Jan-
12O
ct-1
2Au
g-13
May
-14
Feb-
15N
ov-1
5Au
g-16
Jun-
17M
ar-1
8D
ec-1
8Se
p-19
Jun-
20
AART Industrial Production Diffusion IndexPMI New Export Orders
PMI Purchasing Managers Index A reading above 50 indicates the manufacturing economy is generally expanding below 50 indicates it is generally contracting AART Industrial Production Diffusion Index is a proprietary index based on industrial production data Gray bars represent China growth recessions as defined by AART LEFT Source China National Bureau of Statistics Haver Analytics Fidelity Investments (AART) AART Diffusion Index as of 53120 PMI as of 6302020 RIGHT Index values above 100 denote optimism values below 100 denote pessimism and an index value of 100 denotes neutral sentiment Source China National Bureau of Statistics Haver Analytics Fidelity Investments (AART) as of 53120 13
China Industrial Activity China Consumer Confidence Index
90
95
100
105
110
115
120
125
130
Jun-
10
Jun-
11
Jun-
12
Jun-
13
Jun-
14
Jun-
15
Jun-
16
Jun-
17
Jun-
18
Jun-
19
Jun-
20
Consumer Confidence Index
Percent of Industries in Expansion Index Value 100 = Neutral SentimentPMI
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
ECO
NO
MY
LEFT Source Census Haver Analytics Fidelity Investments (AART) as of 62720 RIGHT Workers receiving unemployment insurance ldquoWith $250rdquo is if extra benefit is reduced to that level after expiration of $600 Worker income cohorts are defined by percentiles low Income (25th percentile) middle income (50th percentile) and high income (75th percentile) Working paper ldquoUS Unemployment Insurance Replacement Rates During the Pandemicrdquo by Ganong Noel and Vavra Fidelity Investments (AART) as of 53120 14
-60
-40
-20
0
20
40
60
80
100
LowIncome
MiddleIncome
HighIncome
With $600 CARES Benefit With $250
Percent Above or Below Normal Income
Weekly Earnings of Unemployed Individuals
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
0
001
002
003
004
005
006
007
008
009
01
0
1
2
3
4
5
6
7
Jun-
07
Jun-
08
Jun-
09
Jun-
10
Jun-
11
Jun-
12
Jun-
13
Jun-
14
Jun-
15
Jun-
16
Jun-
17
Jun-
18
Jun-
19
Jun-
20
Initial Claims
Millions
US Unemployment Claims
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Conference Board Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Other industries most impacted shaded in blue include For GDP Recreation Services Autos Transportation Services Recreation Goods Clothing Gasoline Furnishings For Employment Retail Transportation Source Conference Board NBER Haver Analytics Fidelity Investments (AART) as of 2292015
Restaurants and Hotels
Leisure and Hospitality
0
5
10
15
20
25
GDP Private Employment
Largest Affected Industry Other
Sectors Most Impacted by COVID-19
Share
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Consumer Sentiment
00
1
2
3
4
5
6
7
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
2020
Consumer ExpectationsPresent Situation
Ratio
ECO
NO
MY
ldquoFastrdquo reopening states include Arizona Florida Georgia and Texas ldquoSlowrdquo reopening states include Massachusetts New York and New Jersey LEFT Source Johns Hopkins University Haver Analytics Fidelity Investments (AART) as of 7320 RIGHT Baseline is defined as the median for that day of the week during the period 1420ndash13120 Source OpenTable Homebase Haver Analytics Fidelity Investments (AART) as of 62620
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
Hours Worked byEmployees
Local BusinessesOpen
OpenTableReservations YoY
April Trough 62620 61820
Cases (Five Day Moving Average)
New COVID-19 Cases Daily Data in ldquoFastrdquo Reopening States
Hours and Businesses (0 = Baseline) Year-Over-Year
16
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
0
1000
2000
3000
4000
5000
6000
7000
8000
33
203
102
03
172
03
242
03
312
04
720
414
20
421
20
428
20
55
205
122
05
192
05
262
06
220
69
206
162
06
232
06
302
0
Fast Reopening States Slow Reopening States
ECO
NO
MY
-30
-20
-10
0
10
20
30
Jun-19 Sep-19 Dec-19 Mar-20 Jun-20
2020 2021
40
50
60
70
80
90
100
110
120
-12 -9 -6 -3 0 3 6 9 12 15 18 21 24 27 30 33 36
Months (t=0 is start of recession)
Average since 1980 2007ndash20082020ndash22 Consensus Estimate
LEFT AND RIGHT EPS Earnings per share Past performance is no guarantee of future results Source Bloomberg Finance LP Fidelity Investments (AART) Haver Analytics as of 6252017
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
ECO
NO
MY
050
075
100
125
150
175
200
225
250
275
ClevelandFed
AtlantaFed
New YorkFed
CoreCPI
May-2020 Dec-2019
LEFT CPI Consumer Price Index Core CPI excludes Food and Energy Cleveland Fed Cleveland 16 Trimmed Mean CPI Atlanta Fed StickyCPI New York Fed Underlying Inflation Gauge Source Federal Reserve Board Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GFC Global Financial Crisis Inflation curves derived from Inflation swaps Source Bloomberg Financial Fidelity Investments (AART) as of 6302018
Measures of US Inflation
Year-Over-Year
050
075
100
125
150
175
200
225
250
275
1 2 3 4 5 6 7 8 9 10 20 30Years
Expected CPI Year-Over-Year
US Inflation Expectations
June 2010
June 2020
GFC
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Federal Reserve Board NBER Bureau of Economic Analysis Haver Analytics Fidelity Investments (AART) as of 33120 RIGHT The 50 of households with the lowest incomes Source Federal Reserve Board Bureau of Economic Analysis World Inequality Data Haver Analytics Fidelity Investments (AART) as of 12311819
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
0
0
0
0
0
0
0
0
0
0
0
70
75
80
85
90
95
100
105
1993 1996 1999 2002 2005 2008 2011 2014 2017 2020
Non-Financial Corporate CreditRevenues
12
13
14
15
16
17
18
19
20
21
300
350
400
450
500
550
600
1976 1981 1986 1991 1996 2001 2006 2011 2016
Financial Assets Bottom 50 Household Income
Household Financial Assets and Income
Share of Household Income
US Corporate Debt
Ratio Share of Disposable Income
ECO
NO
MY
-$1000
$0
$1000
$2000
$3000
$4000
$5000
May
-201
1
Nov
-201
1
May
-201
2
Nov
-201
2
May
-201
3
Nov
-201
3
May
-201
4
Nov
-201
4
May
-201
5
Nov
-201
5
May
-201
6
Nov
-201
6
May
-201
7
Nov
-201
7
May
-201
8
Nov
-201
8
May
-201
9
Nov
-201
9
May
-202
0
UK Japan Eurozone US Total
20
Billions (12-Month Change)
QE Quantitative Easing Source Federal Reserve Bank of Japan European Central Bank Bank of England Haver Analytics Fidelity Investments (AART) as of 53120
Central Bank Balance Sheets
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
ECO
NO
MY
-20
-15
-10
-5
0
5
10
-100
-075
-050
-025
000
025
050
075
100
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
State and Local Government Federal Government Federal Budget Deficit
Source CBO BEA Haver Analytics 2020 and 2021 Budget Deficits are CBO projections (httpswwwcbogovsystemfiles2020-0456344-CBO-presentationpdf ) Fidelity Investments (AART) 21
Percent of GDP
US Federal Fiscal Deficit and Government Impact on GDP
Contribution to GDP
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
ECO
NO
MY
22 Ag Agriculture FDI Foreign direct investment ADR American depositary receipt Source Fidelity Investments (AART) as of 63020
US-China Relationship
Geopolitical Rivalry
Trade
Industrial Policy Issuesbull IT sectorbull Health carebull Supply chains
Strategic Competition
Policy Tools of De-Globalization
Military Hegemony
in Asia
Economic Advantage in
Key Areas
Consumer and Other
Goods
Bilateral Flashpointsbull Hong Kongbull Detention campsbull Taiwanbull South China Sea
Policy Action Categories Example
TariffTrade Barriers Raise tariffs to reduce imports
Export and FDI Restrictions Curtail high-tech exports
Industrial Policies Mandate supply chainonshoring
ImmigrationHuman Mobility Tighter borders
Financial Restrictions Penalties
US sanctions tax policies
InfoData Restrictions Chinas firewall
Portfolio Investment Restrictions
US de-lists Chinese ADRs
Politicized Debt Action Selective US default
BroadEconomic
Investment
TariffsMarket Accessbull Phase 1 ag deal
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
ECO
NO
MY
Risks
23
Business Cycle
Asset Allocation Implications
US is in process of emerging from a brief but sharp recession
Policymakers providing abundant support to markets and economy
Emphasize focus on diversified anddisciplined investment strategies
Members hold a wide range of views but see opportunities within asset classes
Opportunities include non-US assets US small cap and value equities TIPS and gold
For illustrative purposes only Diversification does not ensure a profit or guarantee against a loss Source Fidelity Investments (AART) as of 63020
The recovery remains highly uncertain given the size and exogenous nature of
the COVID shock
Policy actions are playing a larger role in driving financial market performance than
in past cycles
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
ASSE
TM
ARKE
TS
EM Emerging Markets EMEA Europe the Middle East and Africa For indexes and other important information used to represent above asset categories see Appendix Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged Sector returns represented by SampP 500 sectors Sector investing involves risk Because of its narrow focus sector investing may be more volatile than investing in more diversified baskets of securities Source Bloomberg Finance LP Fidelity Investments (AART) as of 6302025
US Equity Styles Total ReturnInternational Equities and Global Assets Total Return
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
For illustrative purposes only Past performance is no guarantee of future results Diversification does not ensure a profit or guarantee against a loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Fidelity proprietary analysis based on Monte Carlo simulations using historical index returns Domestic Equity Dow Jones US Total Stock Market Index Foreign Equity MSCI ACWI ex USA Index Investment Grade (IG) Bonds Bloomberg Barclays US Aggregate Bond Index High Yield (HY) Bonds ICE BofA US High Yield Index Source Fidelity Investments Morningstar Bloomberg Barclays data as of 63020
-10
-5
0
5
10
15
20
25
Early Mid Late Recession
US Stocks IG Bonds Cash
Annualized Real ReturnAnnualized Nominal Return
75th
percentile
25th
percentile
Median
Asset Class Performance by Cycle Phase (1950ndash2018)
10-Year Portfolio Return Distribution by Cycle Phase Starting Point
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
ASSE
TM
ARKE
TS
-40
-30
-20
-10
0
10
20
30
40
Jun-
12
Sep-
12
Dec
-12
Mar
-13
Jun-
13
Sep-
13
Dec
-13
Mar
-14
Jun-
14
Sep-
14
Dec
-14
Mar
-15
Jun-
15
Sep-
15
Dec
-15
Mar
-16
Jun-
16
Sep-
16
Dec
-16
Mar
-17
Jun-
17
Sep-
17
Dec
-17
Mar
-18
Jun-
18
Sep-
18
Dec
-18
Mar
-19
Jun-
19
Sep-
19
Dec
-19
Mar
-20
Jun-
20
EM DM US
27Past performance is no guarantee of future results DM Developed Markets EM Emerging Markets EPS Earnings per share Forward EPS Next 12 months expectations Source MSCI Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Global EPS Growth (Trailing 12 Months)
Forward EPS
53
01-49
Percent
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
ASSE
TM
ARKE
TS
0
5
10
15
20
25
2005 2008 2011 2014 2017 2020
DM Trailing PE EM Trailing PE US Trailing PE Forward PE
28
DM Non-US Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Price-to-earnings ratio (PE) stock price divided by earnings per share Also known as the multiple PE gives investors an idea of how much they are paying for a companyrsquos earnings power Long-term average PE for Emerging Markets includes data for 1988ndash2017 for Non-US Developed Markets 1973ndash2016 for the United States 1926ndash2017 Indexes DMmdashMSCI EAFE Index EMmdashMSCI EM Index United StatesmdashSampP 500 Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
EM
US
DM
DM Long-Term Average
US Long-Term Average
EM Long-Term Average
Global Stock Market PE Ratios
Ratio
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
ASSE
TM
ARKE
TS
0
10
20
30
40
50
60
70
80
90
100
Rus
sia
Turk
eySp
ain
Sout
h Ko
rea
UK
Indo
nesi
aC
hina
Aust
ralia EM
Braz
ilIta
lyM
exic
oG
erm
any
Philip
pine
sD
MFr
ance
Can
ada
Japa
nIn
dia
US
-35
-30
-25
-20
-15
-10
-5
0
5
10
GBP JPY CAD EUR CNY
29
DM Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information LEFT Price-to-earnings (PE) ratio (or multiple) stock price divided by earnings per share which indicates how much investors are paying for a companyrsquos earnings power Cyclically adjusted earnings are 10-year averages adjusted for inflation Source FactSet countriesrsquo statistical organizations Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GBPmdashBritish pound JPYmdashJapanese yen CADmdashCanadian dollar EURmdasheuro CNYmdashChinese yuanSource Federal Reserve Board Haver Analytics Fidelity Investments (AART) as of 63020
53120 20-Year Range
Valuation of Real Exchange Rates
Expensive vs $
Cheap vs $
Shiller CAPE
Last 12-Month Range 63020
Cyclically Adjusted PEs Valuation of Major Currencies vs USD
Non-US Equity and Forex Valuations Relatively AttractiveCyclically adjusted PE (CAPE) ratios for international developed-market and emerging-market equities remained below US valuations providing a relatively favorable long-term backdrop for non-US stocks In Q2 the US dollar depreciated against many of the worldrsquos major currencies nevertheless US dollar valuations remain relatively expensive overall
ASSE
TM
ARKE
TS
LEFT TIPS Treasury Inflation-Protected Securities SOURCE Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Source CME Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 6302030
00
05
10
15
20
25
30
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
10 Year LT Average (Since 1998)
US Treasury Breakeven Inflation Rates
Yield
$0
$20
$40
$60
$80
$100
$120
$140
$160
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
WTI Crude Oil
Inflation Adjusted Price (March 2020 Dollars)
Real Oil Price
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
ASSE
TM
ARKE
TS
31
Past performance is no guarantee of future results Sectors as defined by GICS White line is a theoretical representation of the business cycle as it moves through early mid late and recession phases Green and red shaded portions above respectively represent over- or underperformance relative to the broader market unshaded (white) portions suggest no clear pattern of over- or underperformance Double +ndash signs indicate that the sector is showing a consistent signal across all three metrics full-phase average performance median monthly difference and cycle hit rate A single +ndash indicates a mixed or less consistent signal Return data from 1962 to 2016 Source Fidelity Investments (AART) as of 63020
Business-Cycle Approach to SectorsSector EARLY CYCLE
Economically sensitive sectors may tend to outperform while more defensive sectors have
tended to underperform
Making marginal portfolio allocation changes to manage
drawdown risk with sectorsmay enhance risk-adjusted
returns during this cycle
Defensive and inflation-resistantsectors tend to perform better
while more cyclical sectors underperform
Since performance is generally negative in
recessions investors should focus on the most defensive
historically stable sectors
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
ASSE
TM
ARKE
TS
400
420
440
460
480
500
520
540
092
094
096
098
100
102
104
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18D
ec-1
8M
ar-1
9Ju
n-19
Sep-
19D
ec-1
9M
ar-2
0Ju
n-20
Value vs Growth Performance CRB Raw Industrials Index
LEFT Gray bars represent US recessions as defined by NBER Asset classes represented by Value Fidelity Value ETF Growth Russell 1000reg
Growth Index Commodity Prices CRB Raw Industrials Index Source Federal Reserve Board NBER Haver Analytics Bloomberg Finance LP Fidelity Investments (AART) as of 63020 RIGHT Asset classes represented by Growth Russell 1000reg Growth Index Value Russell 1000reg Value Index Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020 Past performance is no guarantee of future results All indexes are unmanaged You cannot invest directly in an index Unlike mutual funds ETF shares are bought and sold at market price which may be higher or lower than their NAV and are not individually redeemed from the fund32
Value Equity More Attractive after Long UnderperformanceOn a cyclical basis the relative performance of value stocks has tended to correlate generally with the direction of the global economy and in particular with commodity prices which may be bottoming after the worldwide COVID-19 shutdown Meanwhile after a decade of trailing other leading factors and styles valuersquos relative valuations are at their most attractive in roughly 20 years
Price-to-Book Valuation SpreadsValue Relative Performance vs Commodity Prices
Ratio PB RatioIndex
0
1
2
3
4
5
6
7
8
9
10
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Growth vs Value
ASSE
TM
ARKE
TS
33
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Percentile ranks of yields and spreads based on historical period from 1993 to 2020 MBS mortgage-backed securities Source Bloomberg Barclays Bank of America Merrill Lynch JP Morgan Fidelity Investments (AART) as of 63020
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
SUM
MAR
Y
40
50
60
70
80
90
100
110
0 30 60 90 120 150 180 210 240 270 300 330 360
1960 1970 1973 1980 1981 1990 2001 2008 2020
6
Since the 1973 peak is not regained until after the 1980 recession the 1980 line starts at its near term high on 2201980 Index SampP 500reg Lines represent a 5 day moving average table uses daily values and 1973 recession not included in average for return to peak All indexes are unmanaged You cannot invest directly in an index Past performance is no guarantee of future results Source Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Stock Market Drawdowns during Recessions (19602020)
Days since Peak
Index Peak = 100
Average since 1960 2020Total Drawdown -33 -34Drawdown Length (Days) 340 23Drawdown through Recession End -20 -8 (63020)Days to Return to Peak 756
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
SUM
MAR
Y
$0
$1
$2
$3
$4
$5
$6
$7
May
-15
Nov
-15
May
-16
Nov
-16
May
-17
Nov
-17
May
-18
Nov
-18
May
-19
Nov
-19
May
-20
Transfer Receipts from Govt Personal Savings
LEFT Source Bureau of Economic Analysis Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT Source SIFMA Fidelity Investments (AART) as of 53120 7
$0
$200
$400
$600
$800
$1000
$1200
2015 2016 2017 2018 2019 2020
New Debt Issuance (JanndashMay)
Trillions Billions
Personal Savings and Government Stimulus Corporate Bond New Issuance
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
SUM
MAR
Y
-10
-05
00
05
10
15
20
25
30
35
40
Jun-
2010
Oct
-201
0
Feb-
2011
Jun-
2011
Oct
-201
1
Feb-
2012
Jun-
2012
Oct
-201
2
Feb-
2013
Jun-
2013
Oct
-201
3
Feb-
2014
Jun-
2014
Oct
-201
4
Feb-
2015
Jun-
2015
Oct
-201
5
Feb-
2016
Jun-
2016
Oct
-201
6
Feb-
2017
Jun-
2017
Oct
-201
7
Feb-
2018
Jun-
2018
Oct
-201
8
Feb-
2019
Jun-
2019
Oct
-201
9
Feb-
2020
Jun-
2020
Inflation Expectations Real Yields Nominal Yield
8
Yield
Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
ECO
NO
MY
10
DYNAMIC ASSET ALLOCATION TIMELINE
Business Cycle
(10ndash30 years)Secular
HORIZONS
(1ndash10 years)
Tactical(1ndash12 months)
Portfolio ConstructionAsset Class | CountryRegion | Sectors | Correlations
For illustrative purposes only Source Fidelity Investments (AART) as of 63020
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
ECO
NO
MY
11
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 A growth recession is a significant decline in activity relative to a countryrsquos long-term economic potential We use the ldquogrowth cyclerdquo definition for most developing economies such as China because they tend to exhibit strong trend performance driven by rapid factor accumulation and increases in productivity and the deviation from the trend tends to matter most for asset returns We use the classic definition of recession involving an outright contraction in economic activity for developed economies Source Fidelity Investments (AART) as of 63020
Business Cycle Framework
ChinaUS Eurozone UK Canada Australia
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
European energy demand is reflected by a five-day moving average of daily electric loads Chinese energy demand is reflected by a seven-day moving average of daily coal consumption and US energy demand is reflected by weekly electric output The distance from average for the US and Europe is calculated as the current yearrsquos data as a percentage above or below the 2017ndash2019 weekly average The distance from average for the China is calculated as the current yearrsquos data as a percentage above or below the 2017ndash2019 daily average indexed to the Chinese New Year GDP-weighted countries in Europe include Italy Germany United Kingdom Spain Austria and France Source CCTD European Network of Transmission System Operators for Electricity Edison Electric Institute Haver Analytics Fidelity Investments (AART) as of 62820 12
Distance from Average
High-Frequency Energy Demand
-12-9-2
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
ECO
NO
MY
25
30
35
40
45
50
55
60
65
70
75
0
10
20
30
40
50
60
70
80
90
100
Dec
-05
Sep-
06Ju
n-07
Mar
-08
Dec
-08
Oct
-09
Jul-1
0Ap
r-11
Jan-
12O
ct-1
2Au
g-13
May
-14
Feb-
15N
ov-1
5Au
g-16
Jun-
17M
ar-1
8D
ec-1
8Se
p-19
Jun-
20
AART Industrial Production Diffusion IndexPMI New Export Orders
PMI Purchasing Managers Index A reading above 50 indicates the manufacturing economy is generally expanding below 50 indicates it is generally contracting AART Industrial Production Diffusion Index is a proprietary index based on industrial production data Gray bars represent China growth recessions as defined by AART LEFT Source China National Bureau of Statistics Haver Analytics Fidelity Investments (AART) AART Diffusion Index as of 53120 PMI as of 6302020 RIGHT Index values above 100 denote optimism values below 100 denote pessimism and an index value of 100 denotes neutral sentiment Source China National Bureau of Statistics Haver Analytics Fidelity Investments (AART) as of 53120 13
China Industrial Activity China Consumer Confidence Index
90
95
100
105
110
115
120
125
130
Jun-
10
Jun-
11
Jun-
12
Jun-
13
Jun-
14
Jun-
15
Jun-
16
Jun-
17
Jun-
18
Jun-
19
Jun-
20
Consumer Confidence Index
Percent of Industries in Expansion Index Value 100 = Neutral SentimentPMI
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
ECO
NO
MY
LEFT Source Census Haver Analytics Fidelity Investments (AART) as of 62720 RIGHT Workers receiving unemployment insurance ldquoWith $250rdquo is if extra benefit is reduced to that level after expiration of $600 Worker income cohorts are defined by percentiles low Income (25th percentile) middle income (50th percentile) and high income (75th percentile) Working paper ldquoUS Unemployment Insurance Replacement Rates During the Pandemicrdquo by Ganong Noel and Vavra Fidelity Investments (AART) as of 53120 14
-60
-40
-20
0
20
40
60
80
100
LowIncome
MiddleIncome
HighIncome
With $600 CARES Benefit With $250
Percent Above or Below Normal Income
Weekly Earnings of Unemployed Individuals
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
0
001
002
003
004
005
006
007
008
009
01
0
1
2
3
4
5
6
7
Jun-
07
Jun-
08
Jun-
09
Jun-
10
Jun-
11
Jun-
12
Jun-
13
Jun-
14
Jun-
15
Jun-
16
Jun-
17
Jun-
18
Jun-
19
Jun-
20
Initial Claims
Millions
US Unemployment Claims
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Conference Board Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Other industries most impacted shaded in blue include For GDP Recreation Services Autos Transportation Services Recreation Goods Clothing Gasoline Furnishings For Employment Retail Transportation Source Conference Board NBER Haver Analytics Fidelity Investments (AART) as of 2292015
Restaurants and Hotels
Leisure and Hospitality
0
5
10
15
20
25
GDP Private Employment
Largest Affected Industry Other
Sectors Most Impacted by COVID-19
Share
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Consumer Sentiment
00
1
2
3
4
5
6
7
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
2020
Consumer ExpectationsPresent Situation
Ratio
ECO
NO
MY
ldquoFastrdquo reopening states include Arizona Florida Georgia and Texas ldquoSlowrdquo reopening states include Massachusetts New York and New Jersey LEFT Source Johns Hopkins University Haver Analytics Fidelity Investments (AART) as of 7320 RIGHT Baseline is defined as the median for that day of the week during the period 1420ndash13120 Source OpenTable Homebase Haver Analytics Fidelity Investments (AART) as of 62620
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
Hours Worked byEmployees
Local BusinessesOpen
OpenTableReservations YoY
April Trough 62620 61820
Cases (Five Day Moving Average)
New COVID-19 Cases Daily Data in ldquoFastrdquo Reopening States
Hours and Businesses (0 = Baseline) Year-Over-Year
16
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
0
1000
2000
3000
4000
5000
6000
7000
8000
33
203
102
03
172
03
242
03
312
04
720
414
20
421
20
428
20
55
205
122
05
192
05
262
06
220
69
206
162
06
232
06
302
0
Fast Reopening States Slow Reopening States
ECO
NO
MY
-30
-20
-10
0
10
20
30
Jun-19 Sep-19 Dec-19 Mar-20 Jun-20
2020 2021
40
50
60
70
80
90
100
110
120
-12 -9 -6 -3 0 3 6 9 12 15 18 21 24 27 30 33 36
Months (t=0 is start of recession)
Average since 1980 2007ndash20082020ndash22 Consensus Estimate
LEFT AND RIGHT EPS Earnings per share Past performance is no guarantee of future results Source Bloomberg Finance LP Fidelity Investments (AART) Haver Analytics as of 6252017
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
ECO
NO
MY
050
075
100
125
150
175
200
225
250
275
ClevelandFed
AtlantaFed
New YorkFed
CoreCPI
May-2020 Dec-2019
LEFT CPI Consumer Price Index Core CPI excludes Food and Energy Cleveland Fed Cleveland 16 Trimmed Mean CPI Atlanta Fed StickyCPI New York Fed Underlying Inflation Gauge Source Federal Reserve Board Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GFC Global Financial Crisis Inflation curves derived from Inflation swaps Source Bloomberg Financial Fidelity Investments (AART) as of 6302018
Measures of US Inflation
Year-Over-Year
050
075
100
125
150
175
200
225
250
275
1 2 3 4 5 6 7 8 9 10 20 30Years
Expected CPI Year-Over-Year
US Inflation Expectations
June 2010
June 2020
GFC
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Federal Reserve Board NBER Bureau of Economic Analysis Haver Analytics Fidelity Investments (AART) as of 33120 RIGHT The 50 of households with the lowest incomes Source Federal Reserve Board Bureau of Economic Analysis World Inequality Data Haver Analytics Fidelity Investments (AART) as of 12311819
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
0
0
0
0
0
0
0
0
0
0
0
70
75
80
85
90
95
100
105
1993 1996 1999 2002 2005 2008 2011 2014 2017 2020
Non-Financial Corporate CreditRevenues
12
13
14
15
16
17
18
19
20
21
300
350
400
450
500
550
600
1976 1981 1986 1991 1996 2001 2006 2011 2016
Financial Assets Bottom 50 Household Income
Household Financial Assets and Income
Share of Household Income
US Corporate Debt
Ratio Share of Disposable Income
ECO
NO
MY
-$1000
$0
$1000
$2000
$3000
$4000
$5000
May
-201
1
Nov
-201
1
May
-201
2
Nov
-201
2
May
-201
3
Nov
-201
3
May
-201
4
Nov
-201
4
May
-201
5
Nov
-201
5
May
-201
6
Nov
-201
6
May
-201
7
Nov
-201
7
May
-201
8
Nov
-201
8
May
-201
9
Nov
-201
9
May
-202
0
UK Japan Eurozone US Total
20
Billions (12-Month Change)
QE Quantitative Easing Source Federal Reserve Bank of Japan European Central Bank Bank of England Haver Analytics Fidelity Investments (AART) as of 53120
Central Bank Balance Sheets
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
ECO
NO
MY
-20
-15
-10
-5
0
5
10
-100
-075
-050
-025
000
025
050
075
100
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
State and Local Government Federal Government Federal Budget Deficit
Source CBO BEA Haver Analytics 2020 and 2021 Budget Deficits are CBO projections (httpswwwcbogovsystemfiles2020-0456344-CBO-presentationpdf ) Fidelity Investments (AART) 21
Percent of GDP
US Federal Fiscal Deficit and Government Impact on GDP
Contribution to GDP
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
ECO
NO
MY
22 Ag Agriculture FDI Foreign direct investment ADR American depositary receipt Source Fidelity Investments (AART) as of 63020
US-China Relationship
Geopolitical Rivalry
Trade
Industrial Policy Issuesbull IT sectorbull Health carebull Supply chains
Strategic Competition
Policy Tools of De-Globalization
Military Hegemony
in Asia
Economic Advantage in
Key Areas
Consumer and Other
Goods
Bilateral Flashpointsbull Hong Kongbull Detention campsbull Taiwanbull South China Sea
Policy Action Categories Example
TariffTrade Barriers Raise tariffs to reduce imports
Export and FDI Restrictions Curtail high-tech exports
Industrial Policies Mandate supply chainonshoring
ImmigrationHuman Mobility Tighter borders
Financial Restrictions Penalties
US sanctions tax policies
InfoData Restrictions Chinas firewall
Portfolio Investment Restrictions
US de-lists Chinese ADRs
Politicized Debt Action Selective US default
BroadEconomic
Investment
TariffsMarket Accessbull Phase 1 ag deal
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
ECO
NO
MY
Risks
23
Business Cycle
Asset Allocation Implications
US is in process of emerging from a brief but sharp recession
Policymakers providing abundant support to markets and economy
Emphasize focus on diversified anddisciplined investment strategies
Members hold a wide range of views but see opportunities within asset classes
Opportunities include non-US assets US small cap and value equities TIPS and gold
For illustrative purposes only Diversification does not ensure a profit or guarantee against a loss Source Fidelity Investments (AART) as of 63020
The recovery remains highly uncertain given the size and exogenous nature of
the COVID shock
Policy actions are playing a larger role in driving financial market performance than
in past cycles
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
ASSE
TM
ARKE
TS
EM Emerging Markets EMEA Europe the Middle East and Africa For indexes and other important information used to represent above asset categories see Appendix Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged Sector returns represented by SampP 500 sectors Sector investing involves risk Because of its narrow focus sector investing may be more volatile than investing in more diversified baskets of securities Source Bloomberg Finance LP Fidelity Investments (AART) as of 6302025
US Equity Styles Total ReturnInternational Equities and Global Assets Total Return
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
For illustrative purposes only Past performance is no guarantee of future results Diversification does not ensure a profit or guarantee against a loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Fidelity proprietary analysis based on Monte Carlo simulations using historical index returns Domestic Equity Dow Jones US Total Stock Market Index Foreign Equity MSCI ACWI ex USA Index Investment Grade (IG) Bonds Bloomberg Barclays US Aggregate Bond Index High Yield (HY) Bonds ICE BofA US High Yield Index Source Fidelity Investments Morningstar Bloomberg Barclays data as of 63020
-10
-5
0
5
10
15
20
25
Early Mid Late Recession
US Stocks IG Bonds Cash
Annualized Real ReturnAnnualized Nominal Return
75th
percentile
25th
percentile
Median
Asset Class Performance by Cycle Phase (1950ndash2018)
10-Year Portfolio Return Distribution by Cycle Phase Starting Point
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
ASSE
TM
ARKE
TS
-40
-30
-20
-10
0
10
20
30
40
Jun-
12
Sep-
12
Dec
-12
Mar
-13
Jun-
13
Sep-
13
Dec
-13
Mar
-14
Jun-
14
Sep-
14
Dec
-14
Mar
-15
Jun-
15
Sep-
15
Dec
-15
Mar
-16
Jun-
16
Sep-
16
Dec
-16
Mar
-17
Jun-
17
Sep-
17
Dec
-17
Mar
-18
Jun-
18
Sep-
18
Dec
-18
Mar
-19
Jun-
19
Sep-
19
Dec
-19
Mar
-20
Jun-
20
EM DM US
27Past performance is no guarantee of future results DM Developed Markets EM Emerging Markets EPS Earnings per share Forward EPS Next 12 months expectations Source MSCI Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Global EPS Growth (Trailing 12 Months)
Forward EPS
53
01-49
Percent
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
ASSE
TM
ARKE
TS
0
5
10
15
20
25
2005 2008 2011 2014 2017 2020
DM Trailing PE EM Trailing PE US Trailing PE Forward PE
28
DM Non-US Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Price-to-earnings ratio (PE) stock price divided by earnings per share Also known as the multiple PE gives investors an idea of how much they are paying for a companyrsquos earnings power Long-term average PE for Emerging Markets includes data for 1988ndash2017 for Non-US Developed Markets 1973ndash2016 for the United States 1926ndash2017 Indexes DMmdashMSCI EAFE Index EMmdashMSCI EM Index United StatesmdashSampP 500 Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
EM
US
DM
DM Long-Term Average
US Long-Term Average
EM Long-Term Average
Global Stock Market PE Ratios
Ratio
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
ASSE
TM
ARKE
TS
0
10
20
30
40
50
60
70
80
90
100
Rus
sia
Turk
eySp
ain
Sout
h Ko
rea
UK
Indo
nesi
aC
hina
Aust
ralia EM
Braz
ilIta
lyM
exic
oG
erm
any
Philip
pine
sD
MFr
ance
Can
ada
Japa
nIn
dia
US
-35
-30
-25
-20
-15
-10
-5
0
5
10
GBP JPY CAD EUR CNY
29
DM Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information LEFT Price-to-earnings (PE) ratio (or multiple) stock price divided by earnings per share which indicates how much investors are paying for a companyrsquos earnings power Cyclically adjusted earnings are 10-year averages adjusted for inflation Source FactSet countriesrsquo statistical organizations Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GBPmdashBritish pound JPYmdashJapanese yen CADmdashCanadian dollar EURmdasheuro CNYmdashChinese yuanSource Federal Reserve Board Haver Analytics Fidelity Investments (AART) as of 63020
53120 20-Year Range
Valuation of Real Exchange Rates
Expensive vs $
Cheap vs $
Shiller CAPE
Last 12-Month Range 63020
Cyclically Adjusted PEs Valuation of Major Currencies vs USD
Non-US Equity and Forex Valuations Relatively AttractiveCyclically adjusted PE (CAPE) ratios for international developed-market and emerging-market equities remained below US valuations providing a relatively favorable long-term backdrop for non-US stocks In Q2 the US dollar depreciated against many of the worldrsquos major currencies nevertheless US dollar valuations remain relatively expensive overall
ASSE
TM
ARKE
TS
LEFT TIPS Treasury Inflation-Protected Securities SOURCE Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Source CME Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 6302030
00
05
10
15
20
25
30
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
10 Year LT Average (Since 1998)
US Treasury Breakeven Inflation Rates
Yield
$0
$20
$40
$60
$80
$100
$120
$140
$160
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
WTI Crude Oil
Inflation Adjusted Price (March 2020 Dollars)
Real Oil Price
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
ASSE
TM
ARKE
TS
31
Past performance is no guarantee of future results Sectors as defined by GICS White line is a theoretical representation of the business cycle as it moves through early mid late and recession phases Green and red shaded portions above respectively represent over- or underperformance relative to the broader market unshaded (white) portions suggest no clear pattern of over- or underperformance Double +ndash signs indicate that the sector is showing a consistent signal across all three metrics full-phase average performance median monthly difference and cycle hit rate A single +ndash indicates a mixed or less consistent signal Return data from 1962 to 2016 Source Fidelity Investments (AART) as of 63020
Business-Cycle Approach to SectorsSector EARLY CYCLE
Economically sensitive sectors may tend to outperform while more defensive sectors have
tended to underperform
Making marginal portfolio allocation changes to manage
drawdown risk with sectorsmay enhance risk-adjusted
returns during this cycle
Defensive and inflation-resistantsectors tend to perform better
while more cyclical sectors underperform
Since performance is generally negative in
recessions investors should focus on the most defensive
historically stable sectors
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
ASSE
TM
ARKE
TS
400
420
440
460
480
500
520
540
092
094
096
098
100
102
104
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18D
ec-1
8M
ar-1
9Ju
n-19
Sep-
19D
ec-1
9M
ar-2
0Ju
n-20
Value vs Growth Performance CRB Raw Industrials Index
LEFT Gray bars represent US recessions as defined by NBER Asset classes represented by Value Fidelity Value ETF Growth Russell 1000reg
Growth Index Commodity Prices CRB Raw Industrials Index Source Federal Reserve Board NBER Haver Analytics Bloomberg Finance LP Fidelity Investments (AART) as of 63020 RIGHT Asset classes represented by Growth Russell 1000reg Growth Index Value Russell 1000reg Value Index Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020 Past performance is no guarantee of future results All indexes are unmanaged You cannot invest directly in an index Unlike mutual funds ETF shares are bought and sold at market price which may be higher or lower than their NAV and are not individually redeemed from the fund32
Value Equity More Attractive after Long UnderperformanceOn a cyclical basis the relative performance of value stocks has tended to correlate generally with the direction of the global economy and in particular with commodity prices which may be bottoming after the worldwide COVID-19 shutdown Meanwhile after a decade of trailing other leading factors and styles valuersquos relative valuations are at their most attractive in roughly 20 years
Price-to-Book Valuation SpreadsValue Relative Performance vs Commodity Prices
Ratio PB RatioIndex
0
1
2
3
4
5
6
7
8
9
10
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Growth vs Value
ASSE
TM
ARKE
TS
33
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Percentile ranks of yields and spreads based on historical period from 1993 to 2020 MBS mortgage-backed securities Source Bloomberg Barclays Bank of America Merrill Lynch JP Morgan Fidelity Investments (AART) as of 63020
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
SUM
MAR
Y
$0
$1
$2
$3
$4
$5
$6
$7
May
-15
Nov
-15
May
-16
Nov
-16
May
-17
Nov
-17
May
-18
Nov
-18
May
-19
Nov
-19
May
-20
Transfer Receipts from Govt Personal Savings
LEFT Source Bureau of Economic Analysis Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT Source SIFMA Fidelity Investments (AART) as of 53120 7
$0
$200
$400
$600
$800
$1000
$1200
2015 2016 2017 2018 2019 2020
New Debt Issuance (JanndashMay)
Trillions Billions
Personal Savings and Government Stimulus Corporate Bond New Issuance
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
SUM
MAR
Y
-10
-05
00
05
10
15
20
25
30
35
40
Jun-
2010
Oct
-201
0
Feb-
2011
Jun-
2011
Oct
-201
1
Feb-
2012
Jun-
2012
Oct
-201
2
Feb-
2013
Jun-
2013
Oct
-201
3
Feb-
2014
Jun-
2014
Oct
-201
4
Feb-
2015
Jun-
2015
Oct
-201
5
Feb-
2016
Jun-
2016
Oct
-201
6
Feb-
2017
Jun-
2017
Oct
-201
7
Feb-
2018
Jun-
2018
Oct
-201
8
Feb-
2019
Jun-
2019
Oct
-201
9
Feb-
2020
Jun-
2020
Inflation Expectations Real Yields Nominal Yield
8
Yield
Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
ECO
NO
MY
10
DYNAMIC ASSET ALLOCATION TIMELINE
Business Cycle
(10ndash30 years)Secular
HORIZONS
(1ndash10 years)
Tactical(1ndash12 months)
Portfolio ConstructionAsset Class | CountryRegion | Sectors | Correlations
For illustrative purposes only Source Fidelity Investments (AART) as of 63020
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
ECO
NO
MY
11
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 A growth recession is a significant decline in activity relative to a countryrsquos long-term economic potential We use the ldquogrowth cyclerdquo definition for most developing economies such as China because they tend to exhibit strong trend performance driven by rapid factor accumulation and increases in productivity and the deviation from the trend tends to matter most for asset returns We use the classic definition of recession involving an outright contraction in economic activity for developed economies Source Fidelity Investments (AART) as of 63020
Business Cycle Framework
ChinaUS Eurozone UK Canada Australia
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
European energy demand is reflected by a five-day moving average of daily electric loads Chinese energy demand is reflected by a seven-day moving average of daily coal consumption and US energy demand is reflected by weekly electric output The distance from average for the US and Europe is calculated as the current yearrsquos data as a percentage above or below the 2017ndash2019 weekly average The distance from average for the China is calculated as the current yearrsquos data as a percentage above or below the 2017ndash2019 daily average indexed to the Chinese New Year GDP-weighted countries in Europe include Italy Germany United Kingdom Spain Austria and France Source CCTD European Network of Transmission System Operators for Electricity Edison Electric Institute Haver Analytics Fidelity Investments (AART) as of 62820 12
Distance from Average
High-Frequency Energy Demand
-12-9-2
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
ECO
NO
MY
25
30
35
40
45
50
55
60
65
70
75
0
10
20
30
40
50
60
70
80
90
100
Dec
-05
Sep-
06Ju
n-07
Mar
-08
Dec
-08
Oct
-09
Jul-1
0Ap
r-11
Jan-
12O
ct-1
2Au
g-13
May
-14
Feb-
15N
ov-1
5Au
g-16
Jun-
17M
ar-1
8D
ec-1
8Se
p-19
Jun-
20
AART Industrial Production Diffusion IndexPMI New Export Orders
PMI Purchasing Managers Index A reading above 50 indicates the manufacturing economy is generally expanding below 50 indicates it is generally contracting AART Industrial Production Diffusion Index is a proprietary index based on industrial production data Gray bars represent China growth recessions as defined by AART LEFT Source China National Bureau of Statistics Haver Analytics Fidelity Investments (AART) AART Diffusion Index as of 53120 PMI as of 6302020 RIGHT Index values above 100 denote optimism values below 100 denote pessimism and an index value of 100 denotes neutral sentiment Source China National Bureau of Statistics Haver Analytics Fidelity Investments (AART) as of 53120 13
China Industrial Activity China Consumer Confidence Index
90
95
100
105
110
115
120
125
130
Jun-
10
Jun-
11
Jun-
12
Jun-
13
Jun-
14
Jun-
15
Jun-
16
Jun-
17
Jun-
18
Jun-
19
Jun-
20
Consumer Confidence Index
Percent of Industries in Expansion Index Value 100 = Neutral SentimentPMI
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
ECO
NO
MY
LEFT Source Census Haver Analytics Fidelity Investments (AART) as of 62720 RIGHT Workers receiving unemployment insurance ldquoWith $250rdquo is if extra benefit is reduced to that level after expiration of $600 Worker income cohorts are defined by percentiles low Income (25th percentile) middle income (50th percentile) and high income (75th percentile) Working paper ldquoUS Unemployment Insurance Replacement Rates During the Pandemicrdquo by Ganong Noel and Vavra Fidelity Investments (AART) as of 53120 14
-60
-40
-20
0
20
40
60
80
100
LowIncome
MiddleIncome
HighIncome
With $600 CARES Benefit With $250
Percent Above or Below Normal Income
Weekly Earnings of Unemployed Individuals
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
0
001
002
003
004
005
006
007
008
009
01
0
1
2
3
4
5
6
7
Jun-
07
Jun-
08
Jun-
09
Jun-
10
Jun-
11
Jun-
12
Jun-
13
Jun-
14
Jun-
15
Jun-
16
Jun-
17
Jun-
18
Jun-
19
Jun-
20
Initial Claims
Millions
US Unemployment Claims
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Conference Board Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Other industries most impacted shaded in blue include For GDP Recreation Services Autos Transportation Services Recreation Goods Clothing Gasoline Furnishings For Employment Retail Transportation Source Conference Board NBER Haver Analytics Fidelity Investments (AART) as of 2292015
Restaurants and Hotels
Leisure and Hospitality
0
5
10
15
20
25
GDP Private Employment
Largest Affected Industry Other
Sectors Most Impacted by COVID-19
Share
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Consumer Sentiment
00
1
2
3
4
5
6
7
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
2020
Consumer ExpectationsPresent Situation
Ratio
ECO
NO
MY
ldquoFastrdquo reopening states include Arizona Florida Georgia and Texas ldquoSlowrdquo reopening states include Massachusetts New York and New Jersey LEFT Source Johns Hopkins University Haver Analytics Fidelity Investments (AART) as of 7320 RIGHT Baseline is defined as the median for that day of the week during the period 1420ndash13120 Source OpenTable Homebase Haver Analytics Fidelity Investments (AART) as of 62620
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
Hours Worked byEmployees
Local BusinessesOpen
OpenTableReservations YoY
April Trough 62620 61820
Cases (Five Day Moving Average)
New COVID-19 Cases Daily Data in ldquoFastrdquo Reopening States
Hours and Businesses (0 = Baseline) Year-Over-Year
16
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
0
1000
2000
3000
4000
5000
6000
7000
8000
33
203
102
03
172
03
242
03
312
04
720
414
20
421
20
428
20
55
205
122
05
192
05
262
06
220
69
206
162
06
232
06
302
0
Fast Reopening States Slow Reopening States
ECO
NO
MY
-30
-20
-10
0
10
20
30
Jun-19 Sep-19 Dec-19 Mar-20 Jun-20
2020 2021
40
50
60
70
80
90
100
110
120
-12 -9 -6 -3 0 3 6 9 12 15 18 21 24 27 30 33 36
Months (t=0 is start of recession)
Average since 1980 2007ndash20082020ndash22 Consensus Estimate
LEFT AND RIGHT EPS Earnings per share Past performance is no guarantee of future results Source Bloomberg Finance LP Fidelity Investments (AART) Haver Analytics as of 6252017
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
ECO
NO
MY
050
075
100
125
150
175
200
225
250
275
ClevelandFed
AtlantaFed
New YorkFed
CoreCPI
May-2020 Dec-2019
LEFT CPI Consumer Price Index Core CPI excludes Food and Energy Cleveland Fed Cleveland 16 Trimmed Mean CPI Atlanta Fed StickyCPI New York Fed Underlying Inflation Gauge Source Federal Reserve Board Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GFC Global Financial Crisis Inflation curves derived from Inflation swaps Source Bloomberg Financial Fidelity Investments (AART) as of 6302018
Measures of US Inflation
Year-Over-Year
050
075
100
125
150
175
200
225
250
275
1 2 3 4 5 6 7 8 9 10 20 30Years
Expected CPI Year-Over-Year
US Inflation Expectations
June 2010
June 2020
GFC
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Federal Reserve Board NBER Bureau of Economic Analysis Haver Analytics Fidelity Investments (AART) as of 33120 RIGHT The 50 of households with the lowest incomes Source Federal Reserve Board Bureau of Economic Analysis World Inequality Data Haver Analytics Fidelity Investments (AART) as of 12311819
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
0
0
0
0
0
0
0
0
0
0
0
70
75
80
85
90
95
100
105
1993 1996 1999 2002 2005 2008 2011 2014 2017 2020
Non-Financial Corporate CreditRevenues
12
13
14
15
16
17
18
19
20
21
300
350
400
450
500
550
600
1976 1981 1986 1991 1996 2001 2006 2011 2016
Financial Assets Bottom 50 Household Income
Household Financial Assets and Income
Share of Household Income
US Corporate Debt
Ratio Share of Disposable Income
ECO
NO
MY
-$1000
$0
$1000
$2000
$3000
$4000
$5000
May
-201
1
Nov
-201
1
May
-201
2
Nov
-201
2
May
-201
3
Nov
-201
3
May
-201
4
Nov
-201
4
May
-201
5
Nov
-201
5
May
-201
6
Nov
-201
6
May
-201
7
Nov
-201
7
May
-201
8
Nov
-201
8
May
-201
9
Nov
-201
9
May
-202
0
UK Japan Eurozone US Total
20
Billions (12-Month Change)
QE Quantitative Easing Source Federal Reserve Bank of Japan European Central Bank Bank of England Haver Analytics Fidelity Investments (AART) as of 53120
Central Bank Balance Sheets
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
ECO
NO
MY
-20
-15
-10
-5
0
5
10
-100
-075
-050
-025
000
025
050
075
100
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
State and Local Government Federal Government Federal Budget Deficit
Source CBO BEA Haver Analytics 2020 and 2021 Budget Deficits are CBO projections (httpswwwcbogovsystemfiles2020-0456344-CBO-presentationpdf ) Fidelity Investments (AART) 21
Percent of GDP
US Federal Fiscal Deficit and Government Impact on GDP
Contribution to GDP
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
ECO
NO
MY
22 Ag Agriculture FDI Foreign direct investment ADR American depositary receipt Source Fidelity Investments (AART) as of 63020
US-China Relationship
Geopolitical Rivalry
Trade
Industrial Policy Issuesbull IT sectorbull Health carebull Supply chains
Strategic Competition
Policy Tools of De-Globalization
Military Hegemony
in Asia
Economic Advantage in
Key Areas
Consumer and Other
Goods
Bilateral Flashpointsbull Hong Kongbull Detention campsbull Taiwanbull South China Sea
Policy Action Categories Example
TariffTrade Barriers Raise tariffs to reduce imports
Export and FDI Restrictions Curtail high-tech exports
Industrial Policies Mandate supply chainonshoring
ImmigrationHuman Mobility Tighter borders
Financial Restrictions Penalties
US sanctions tax policies
InfoData Restrictions Chinas firewall
Portfolio Investment Restrictions
US de-lists Chinese ADRs
Politicized Debt Action Selective US default
BroadEconomic
Investment
TariffsMarket Accessbull Phase 1 ag deal
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
ECO
NO
MY
Risks
23
Business Cycle
Asset Allocation Implications
US is in process of emerging from a brief but sharp recession
Policymakers providing abundant support to markets and economy
Emphasize focus on diversified anddisciplined investment strategies
Members hold a wide range of views but see opportunities within asset classes
Opportunities include non-US assets US small cap and value equities TIPS and gold
For illustrative purposes only Diversification does not ensure a profit or guarantee against a loss Source Fidelity Investments (AART) as of 63020
The recovery remains highly uncertain given the size and exogenous nature of
the COVID shock
Policy actions are playing a larger role in driving financial market performance than
in past cycles
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
ASSE
TM
ARKE
TS
EM Emerging Markets EMEA Europe the Middle East and Africa For indexes and other important information used to represent above asset categories see Appendix Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged Sector returns represented by SampP 500 sectors Sector investing involves risk Because of its narrow focus sector investing may be more volatile than investing in more diversified baskets of securities Source Bloomberg Finance LP Fidelity Investments (AART) as of 6302025
US Equity Styles Total ReturnInternational Equities and Global Assets Total Return
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
For illustrative purposes only Past performance is no guarantee of future results Diversification does not ensure a profit or guarantee against a loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Fidelity proprietary analysis based on Monte Carlo simulations using historical index returns Domestic Equity Dow Jones US Total Stock Market Index Foreign Equity MSCI ACWI ex USA Index Investment Grade (IG) Bonds Bloomberg Barclays US Aggregate Bond Index High Yield (HY) Bonds ICE BofA US High Yield Index Source Fidelity Investments Morningstar Bloomberg Barclays data as of 63020
-10
-5
0
5
10
15
20
25
Early Mid Late Recession
US Stocks IG Bonds Cash
Annualized Real ReturnAnnualized Nominal Return
75th
percentile
25th
percentile
Median
Asset Class Performance by Cycle Phase (1950ndash2018)
10-Year Portfolio Return Distribution by Cycle Phase Starting Point
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
ASSE
TM
ARKE
TS
-40
-30
-20
-10
0
10
20
30
40
Jun-
12
Sep-
12
Dec
-12
Mar
-13
Jun-
13
Sep-
13
Dec
-13
Mar
-14
Jun-
14
Sep-
14
Dec
-14
Mar
-15
Jun-
15
Sep-
15
Dec
-15
Mar
-16
Jun-
16
Sep-
16
Dec
-16
Mar
-17
Jun-
17
Sep-
17
Dec
-17
Mar
-18
Jun-
18
Sep-
18
Dec
-18
Mar
-19
Jun-
19
Sep-
19
Dec
-19
Mar
-20
Jun-
20
EM DM US
27Past performance is no guarantee of future results DM Developed Markets EM Emerging Markets EPS Earnings per share Forward EPS Next 12 months expectations Source MSCI Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Global EPS Growth (Trailing 12 Months)
Forward EPS
53
01-49
Percent
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
ASSE
TM
ARKE
TS
0
5
10
15
20
25
2005 2008 2011 2014 2017 2020
DM Trailing PE EM Trailing PE US Trailing PE Forward PE
28
DM Non-US Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Price-to-earnings ratio (PE) stock price divided by earnings per share Also known as the multiple PE gives investors an idea of how much they are paying for a companyrsquos earnings power Long-term average PE for Emerging Markets includes data for 1988ndash2017 for Non-US Developed Markets 1973ndash2016 for the United States 1926ndash2017 Indexes DMmdashMSCI EAFE Index EMmdashMSCI EM Index United StatesmdashSampP 500 Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
EM
US
DM
DM Long-Term Average
US Long-Term Average
EM Long-Term Average
Global Stock Market PE Ratios
Ratio
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
ASSE
TM
ARKE
TS
0
10
20
30
40
50
60
70
80
90
100
Rus
sia
Turk
eySp
ain
Sout
h Ko
rea
UK
Indo
nesi
aC
hina
Aust
ralia EM
Braz
ilIta
lyM
exic
oG
erm
any
Philip
pine
sD
MFr
ance
Can
ada
Japa
nIn
dia
US
-35
-30
-25
-20
-15
-10
-5
0
5
10
GBP JPY CAD EUR CNY
29
DM Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information LEFT Price-to-earnings (PE) ratio (or multiple) stock price divided by earnings per share which indicates how much investors are paying for a companyrsquos earnings power Cyclically adjusted earnings are 10-year averages adjusted for inflation Source FactSet countriesrsquo statistical organizations Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GBPmdashBritish pound JPYmdashJapanese yen CADmdashCanadian dollar EURmdasheuro CNYmdashChinese yuanSource Federal Reserve Board Haver Analytics Fidelity Investments (AART) as of 63020
53120 20-Year Range
Valuation of Real Exchange Rates
Expensive vs $
Cheap vs $
Shiller CAPE
Last 12-Month Range 63020
Cyclically Adjusted PEs Valuation of Major Currencies vs USD
Non-US Equity and Forex Valuations Relatively AttractiveCyclically adjusted PE (CAPE) ratios for international developed-market and emerging-market equities remained below US valuations providing a relatively favorable long-term backdrop for non-US stocks In Q2 the US dollar depreciated against many of the worldrsquos major currencies nevertheless US dollar valuations remain relatively expensive overall
ASSE
TM
ARKE
TS
LEFT TIPS Treasury Inflation-Protected Securities SOURCE Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Source CME Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 6302030
00
05
10
15
20
25
30
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
10 Year LT Average (Since 1998)
US Treasury Breakeven Inflation Rates
Yield
$0
$20
$40
$60
$80
$100
$120
$140
$160
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
WTI Crude Oil
Inflation Adjusted Price (March 2020 Dollars)
Real Oil Price
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
ASSE
TM
ARKE
TS
31
Past performance is no guarantee of future results Sectors as defined by GICS White line is a theoretical representation of the business cycle as it moves through early mid late and recession phases Green and red shaded portions above respectively represent over- or underperformance relative to the broader market unshaded (white) portions suggest no clear pattern of over- or underperformance Double +ndash signs indicate that the sector is showing a consistent signal across all three metrics full-phase average performance median monthly difference and cycle hit rate A single +ndash indicates a mixed or less consistent signal Return data from 1962 to 2016 Source Fidelity Investments (AART) as of 63020
Business-Cycle Approach to SectorsSector EARLY CYCLE
Economically sensitive sectors may tend to outperform while more defensive sectors have
tended to underperform
Making marginal portfolio allocation changes to manage
drawdown risk with sectorsmay enhance risk-adjusted
returns during this cycle
Defensive and inflation-resistantsectors tend to perform better
while more cyclical sectors underperform
Since performance is generally negative in
recessions investors should focus on the most defensive
historically stable sectors
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
ASSE
TM
ARKE
TS
400
420
440
460
480
500
520
540
092
094
096
098
100
102
104
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18D
ec-1
8M
ar-1
9Ju
n-19
Sep-
19D
ec-1
9M
ar-2
0Ju
n-20
Value vs Growth Performance CRB Raw Industrials Index
LEFT Gray bars represent US recessions as defined by NBER Asset classes represented by Value Fidelity Value ETF Growth Russell 1000reg
Growth Index Commodity Prices CRB Raw Industrials Index Source Federal Reserve Board NBER Haver Analytics Bloomberg Finance LP Fidelity Investments (AART) as of 63020 RIGHT Asset classes represented by Growth Russell 1000reg Growth Index Value Russell 1000reg Value Index Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020 Past performance is no guarantee of future results All indexes are unmanaged You cannot invest directly in an index Unlike mutual funds ETF shares are bought and sold at market price which may be higher or lower than their NAV and are not individually redeemed from the fund32
Value Equity More Attractive after Long UnderperformanceOn a cyclical basis the relative performance of value stocks has tended to correlate generally with the direction of the global economy and in particular with commodity prices which may be bottoming after the worldwide COVID-19 shutdown Meanwhile after a decade of trailing other leading factors and styles valuersquos relative valuations are at their most attractive in roughly 20 years
Price-to-Book Valuation SpreadsValue Relative Performance vs Commodity Prices
Ratio PB RatioIndex
0
1
2
3
4
5
6
7
8
9
10
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Growth vs Value
ASSE
TM
ARKE
TS
33
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Percentile ranks of yields and spreads based on historical period from 1993 to 2020 MBS mortgage-backed securities Source Bloomberg Barclays Bank of America Merrill Lynch JP Morgan Fidelity Investments (AART) as of 63020
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
SUM
MAR
Y
-10
-05
00
05
10
15
20
25
30
35
40
Jun-
2010
Oct
-201
0
Feb-
2011
Jun-
2011
Oct
-201
1
Feb-
2012
Jun-
2012
Oct
-201
2
Feb-
2013
Jun-
2013
Oct
-201
3
Feb-
2014
Jun-
2014
Oct
-201
4
Feb-
2015
Jun-
2015
Oct
-201
5
Feb-
2016
Jun-
2016
Oct
-201
6
Feb-
2017
Jun-
2017
Oct
-201
7
Feb-
2018
Jun-
2018
Oct
-201
8
Feb-
2019
Jun-
2019
Oct
-201
9
Feb-
2020
Jun-
2020
Inflation Expectations Real Yields Nominal Yield
8
Yield
Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
ECO
NO
MY
10
DYNAMIC ASSET ALLOCATION TIMELINE
Business Cycle
(10ndash30 years)Secular
HORIZONS
(1ndash10 years)
Tactical(1ndash12 months)
Portfolio ConstructionAsset Class | CountryRegion | Sectors | Correlations
For illustrative purposes only Source Fidelity Investments (AART) as of 63020
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
ECO
NO
MY
11
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 A growth recession is a significant decline in activity relative to a countryrsquos long-term economic potential We use the ldquogrowth cyclerdquo definition for most developing economies such as China because they tend to exhibit strong trend performance driven by rapid factor accumulation and increases in productivity and the deviation from the trend tends to matter most for asset returns We use the classic definition of recession involving an outright contraction in economic activity for developed economies Source Fidelity Investments (AART) as of 63020
Business Cycle Framework
ChinaUS Eurozone UK Canada Australia
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
European energy demand is reflected by a five-day moving average of daily electric loads Chinese energy demand is reflected by a seven-day moving average of daily coal consumption and US energy demand is reflected by weekly electric output The distance from average for the US and Europe is calculated as the current yearrsquos data as a percentage above or below the 2017ndash2019 weekly average The distance from average for the China is calculated as the current yearrsquos data as a percentage above or below the 2017ndash2019 daily average indexed to the Chinese New Year GDP-weighted countries in Europe include Italy Germany United Kingdom Spain Austria and France Source CCTD European Network of Transmission System Operators for Electricity Edison Electric Institute Haver Analytics Fidelity Investments (AART) as of 62820 12
Distance from Average
High-Frequency Energy Demand
-12-9-2
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
ECO
NO
MY
25
30
35
40
45
50
55
60
65
70
75
0
10
20
30
40
50
60
70
80
90
100
Dec
-05
Sep-
06Ju
n-07
Mar
-08
Dec
-08
Oct
-09
Jul-1
0Ap
r-11
Jan-
12O
ct-1
2Au
g-13
May
-14
Feb-
15N
ov-1
5Au
g-16
Jun-
17M
ar-1
8D
ec-1
8Se
p-19
Jun-
20
AART Industrial Production Diffusion IndexPMI New Export Orders
PMI Purchasing Managers Index A reading above 50 indicates the manufacturing economy is generally expanding below 50 indicates it is generally contracting AART Industrial Production Diffusion Index is a proprietary index based on industrial production data Gray bars represent China growth recessions as defined by AART LEFT Source China National Bureau of Statistics Haver Analytics Fidelity Investments (AART) AART Diffusion Index as of 53120 PMI as of 6302020 RIGHT Index values above 100 denote optimism values below 100 denote pessimism and an index value of 100 denotes neutral sentiment Source China National Bureau of Statistics Haver Analytics Fidelity Investments (AART) as of 53120 13
China Industrial Activity China Consumer Confidence Index
90
95
100
105
110
115
120
125
130
Jun-
10
Jun-
11
Jun-
12
Jun-
13
Jun-
14
Jun-
15
Jun-
16
Jun-
17
Jun-
18
Jun-
19
Jun-
20
Consumer Confidence Index
Percent of Industries in Expansion Index Value 100 = Neutral SentimentPMI
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
ECO
NO
MY
LEFT Source Census Haver Analytics Fidelity Investments (AART) as of 62720 RIGHT Workers receiving unemployment insurance ldquoWith $250rdquo is if extra benefit is reduced to that level after expiration of $600 Worker income cohorts are defined by percentiles low Income (25th percentile) middle income (50th percentile) and high income (75th percentile) Working paper ldquoUS Unemployment Insurance Replacement Rates During the Pandemicrdquo by Ganong Noel and Vavra Fidelity Investments (AART) as of 53120 14
-60
-40
-20
0
20
40
60
80
100
LowIncome
MiddleIncome
HighIncome
With $600 CARES Benefit With $250
Percent Above or Below Normal Income
Weekly Earnings of Unemployed Individuals
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
0
001
002
003
004
005
006
007
008
009
01
0
1
2
3
4
5
6
7
Jun-
07
Jun-
08
Jun-
09
Jun-
10
Jun-
11
Jun-
12
Jun-
13
Jun-
14
Jun-
15
Jun-
16
Jun-
17
Jun-
18
Jun-
19
Jun-
20
Initial Claims
Millions
US Unemployment Claims
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Conference Board Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Other industries most impacted shaded in blue include For GDP Recreation Services Autos Transportation Services Recreation Goods Clothing Gasoline Furnishings For Employment Retail Transportation Source Conference Board NBER Haver Analytics Fidelity Investments (AART) as of 2292015
Restaurants and Hotels
Leisure and Hospitality
0
5
10
15
20
25
GDP Private Employment
Largest Affected Industry Other
Sectors Most Impacted by COVID-19
Share
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Consumer Sentiment
00
1
2
3
4
5
6
7
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
2020
Consumer ExpectationsPresent Situation
Ratio
ECO
NO
MY
ldquoFastrdquo reopening states include Arizona Florida Georgia and Texas ldquoSlowrdquo reopening states include Massachusetts New York and New Jersey LEFT Source Johns Hopkins University Haver Analytics Fidelity Investments (AART) as of 7320 RIGHT Baseline is defined as the median for that day of the week during the period 1420ndash13120 Source OpenTable Homebase Haver Analytics Fidelity Investments (AART) as of 62620
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
Hours Worked byEmployees
Local BusinessesOpen
OpenTableReservations YoY
April Trough 62620 61820
Cases (Five Day Moving Average)
New COVID-19 Cases Daily Data in ldquoFastrdquo Reopening States
Hours and Businesses (0 = Baseline) Year-Over-Year
16
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
0
1000
2000
3000
4000
5000
6000
7000
8000
33
203
102
03
172
03
242
03
312
04
720
414
20
421
20
428
20
55
205
122
05
192
05
262
06
220
69
206
162
06
232
06
302
0
Fast Reopening States Slow Reopening States
ECO
NO
MY
-30
-20
-10
0
10
20
30
Jun-19 Sep-19 Dec-19 Mar-20 Jun-20
2020 2021
40
50
60
70
80
90
100
110
120
-12 -9 -6 -3 0 3 6 9 12 15 18 21 24 27 30 33 36
Months (t=0 is start of recession)
Average since 1980 2007ndash20082020ndash22 Consensus Estimate
LEFT AND RIGHT EPS Earnings per share Past performance is no guarantee of future results Source Bloomberg Finance LP Fidelity Investments (AART) Haver Analytics as of 6252017
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
ECO
NO
MY
050
075
100
125
150
175
200
225
250
275
ClevelandFed
AtlantaFed
New YorkFed
CoreCPI
May-2020 Dec-2019
LEFT CPI Consumer Price Index Core CPI excludes Food and Energy Cleveland Fed Cleveland 16 Trimmed Mean CPI Atlanta Fed StickyCPI New York Fed Underlying Inflation Gauge Source Federal Reserve Board Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GFC Global Financial Crisis Inflation curves derived from Inflation swaps Source Bloomberg Financial Fidelity Investments (AART) as of 6302018
Measures of US Inflation
Year-Over-Year
050
075
100
125
150
175
200
225
250
275
1 2 3 4 5 6 7 8 9 10 20 30Years
Expected CPI Year-Over-Year
US Inflation Expectations
June 2010
June 2020
GFC
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Federal Reserve Board NBER Bureau of Economic Analysis Haver Analytics Fidelity Investments (AART) as of 33120 RIGHT The 50 of households with the lowest incomes Source Federal Reserve Board Bureau of Economic Analysis World Inequality Data Haver Analytics Fidelity Investments (AART) as of 12311819
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
0
0
0
0
0
0
0
0
0
0
0
70
75
80
85
90
95
100
105
1993 1996 1999 2002 2005 2008 2011 2014 2017 2020
Non-Financial Corporate CreditRevenues
12
13
14
15
16
17
18
19
20
21
300
350
400
450
500
550
600
1976 1981 1986 1991 1996 2001 2006 2011 2016
Financial Assets Bottom 50 Household Income
Household Financial Assets and Income
Share of Household Income
US Corporate Debt
Ratio Share of Disposable Income
ECO
NO
MY
-$1000
$0
$1000
$2000
$3000
$4000
$5000
May
-201
1
Nov
-201
1
May
-201
2
Nov
-201
2
May
-201
3
Nov
-201
3
May
-201
4
Nov
-201
4
May
-201
5
Nov
-201
5
May
-201
6
Nov
-201
6
May
-201
7
Nov
-201
7
May
-201
8
Nov
-201
8
May
-201
9
Nov
-201
9
May
-202
0
UK Japan Eurozone US Total
20
Billions (12-Month Change)
QE Quantitative Easing Source Federal Reserve Bank of Japan European Central Bank Bank of England Haver Analytics Fidelity Investments (AART) as of 53120
Central Bank Balance Sheets
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
ECO
NO
MY
-20
-15
-10
-5
0
5
10
-100
-075
-050
-025
000
025
050
075
100
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
State and Local Government Federal Government Federal Budget Deficit
Source CBO BEA Haver Analytics 2020 and 2021 Budget Deficits are CBO projections (httpswwwcbogovsystemfiles2020-0456344-CBO-presentationpdf ) Fidelity Investments (AART) 21
Percent of GDP
US Federal Fiscal Deficit and Government Impact on GDP
Contribution to GDP
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
ECO
NO
MY
22 Ag Agriculture FDI Foreign direct investment ADR American depositary receipt Source Fidelity Investments (AART) as of 63020
US-China Relationship
Geopolitical Rivalry
Trade
Industrial Policy Issuesbull IT sectorbull Health carebull Supply chains
Strategic Competition
Policy Tools of De-Globalization
Military Hegemony
in Asia
Economic Advantage in
Key Areas
Consumer and Other
Goods
Bilateral Flashpointsbull Hong Kongbull Detention campsbull Taiwanbull South China Sea
Policy Action Categories Example
TariffTrade Barriers Raise tariffs to reduce imports
Export and FDI Restrictions Curtail high-tech exports
Industrial Policies Mandate supply chainonshoring
ImmigrationHuman Mobility Tighter borders
Financial Restrictions Penalties
US sanctions tax policies
InfoData Restrictions Chinas firewall
Portfolio Investment Restrictions
US de-lists Chinese ADRs
Politicized Debt Action Selective US default
BroadEconomic
Investment
TariffsMarket Accessbull Phase 1 ag deal
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
ECO
NO
MY
Risks
23
Business Cycle
Asset Allocation Implications
US is in process of emerging from a brief but sharp recession
Policymakers providing abundant support to markets and economy
Emphasize focus on diversified anddisciplined investment strategies
Members hold a wide range of views but see opportunities within asset classes
Opportunities include non-US assets US small cap and value equities TIPS and gold
For illustrative purposes only Diversification does not ensure a profit or guarantee against a loss Source Fidelity Investments (AART) as of 63020
The recovery remains highly uncertain given the size and exogenous nature of
the COVID shock
Policy actions are playing a larger role in driving financial market performance than
in past cycles
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
ASSE
TM
ARKE
TS
EM Emerging Markets EMEA Europe the Middle East and Africa For indexes and other important information used to represent above asset categories see Appendix Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged Sector returns represented by SampP 500 sectors Sector investing involves risk Because of its narrow focus sector investing may be more volatile than investing in more diversified baskets of securities Source Bloomberg Finance LP Fidelity Investments (AART) as of 6302025
US Equity Styles Total ReturnInternational Equities and Global Assets Total Return
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
For illustrative purposes only Past performance is no guarantee of future results Diversification does not ensure a profit or guarantee against a loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Fidelity proprietary analysis based on Monte Carlo simulations using historical index returns Domestic Equity Dow Jones US Total Stock Market Index Foreign Equity MSCI ACWI ex USA Index Investment Grade (IG) Bonds Bloomberg Barclays US Aggregate Bond Index High Yield (HY) Bonds ICE BofA US High Yield Index Source Fidelity Investments Morningstar Bloomberg Barclays data as of 63020
-10
-5
0
5
10
15
20
25
Early Mid Late Recession
US Stocks IG Bonds Cash
Annualized Real ReturnAnnualized Nominal Return
75th
percentile
25th
percentile
Median
Asset Class Performance by Cycle Phase (1950ndash2018)
10-Year Portfolio Return Distribution by Cycle Phase Starting Point
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
ASSE
TM
ARKE
TS
-40
-30
-20
-10
0
10
20
30
40
Jun-
12
Sep-
12
Dec
-12
Mar
-13
Jun-
13
Sep-
13
Dec
-13
Mar
-14
Jun-
14
Sep-
14
Dec
-14
Mar
-15
Jun-
15
Sep-
15
Dec
-15
Mar
-16
Jun-
16
Sep-
16
Dec
-16
Mar
-17
Jun-
17
Sep-
17
Dec
-17
Mar
-18
Jun-
18
Sep-
18
Dec
-18
Mar
-19
Jun-
19
Sep-
19
Dec
-19
Mar
-20
Jun-
20
EM DM US
27Past performance is no guarantee of future results DM Developed Markets EM Emerging Markets EPS Earnings per share Forward EPS Next 12 months expectations Source MSCI Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Global EPS Growth (Trailing 12 Months)
Forward EPS
53
01-49
Percent
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
ASSE
TM
ARKE
TS
0
5
10
15
20
25
2005 2008 2011 2014 2017 2020
DM Trailing PE EM Trailing PE US Trailing PE Forward PE
28
DM Non-US Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Price-to-earnings ratio (PE) stock price divided by earnings per share Also known as the multiple PE gives investors an idea of how much they are paying for a companyrsquos earnings power Long-term average PE for Emerging Markets includes data for 1988ndash2017 for Non-US Developed Markets 1973ndash2016 for the United States 1926ndash2017 Indexes DMmdashMSCI EAFE Index EMmdashMSCI EM Index United StatesmdashSampP 500 Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
EM
US
DM
DM Long-Term Average
US Long-Term Average
EM Long-Term Average
Global Stock Market PE Ratios
Ratio
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
ASSE
TM
ARKE
TS
0
10
20
30
40
50
60
70
80
90
100
Rus
sia
Turk
eySp
ain
Sout
h Ko
rea
UK
Indo
nesi
aC
hina
Aust
ralia EM
Braz
ilIta
lyM
exic
oG
erm
any
Philip
pine
sD
MFr
ance
Can
ada
Japa
nIn
dia
US
-35
-30
-25
-20
-15
-10
-5
0
5
10
GBP JPY CAD EUR CNY
29
DM Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information LEFT Price-to-earnings (PE) ratio (or multiple) stock price divided by earnings per share which indicates how much investors are paying for a companyrsquos earnings power Cyclically adjusted earnings are 10-year averages adjusted for inflation Source FactSet countriesrsquo statistical organizations Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GBPmdashBritish pound JPYmdashJapanese yen CADmdashCanadian dollar EURmdasheuro CNYmdashChinese yuanSource Federal Reserve Board Haver Analytics Fidelity Investments (AART) as of 63020
53120 20-Year Range
Valuation of Real Exchange Rates
Expensive vs $
Cheap vs $
Shiller CAPE
Last 12-Month Range 63020
Cyclically Adjusted PEs Valuation of Major Currencies vs USD
Non-US Equity and Forex Valuations Relatively AttractiveCyclically adjusted PE (CAPE) ratios for international developed-market and emerging-market equities remained below US valuations providing a relatively favorable long-term backdrop for non-US stocks In Q2 the US dollar depreciated against many of the worldrsquos major currencies nevertheless US dollar valuations remain relatively expensive overall
ASSE
TM
ARKE
TS
LEFT TIPS Treasury Inflation-Protected Securities SOURCE Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Source CME Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 6302030
00
05
10
15
20
25
30
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
10 Year LT Average (Since 1998)
US Treasury Breakeven Inflation Rates
Yield
$0
$20
$40
$60
$80
$100
$120
$140
$160
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
WTI Crude Oil
Inflation Adjusted Price (March 2020 Dollars)
Real Oil Price
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
ASSE
TM
ARKE
TS
31
Past performance is no guarantee of future results Sectors as defined by GICS White line is a theoretical representation of the business cycle as it moves through early mid late and recession phases Green and red shaded portions above respectively represent over- or underperformance relative to the broader market unshaded (white) portions suggest no clear pattern of over- or underperformance Double +ndash signs indicate that the sector is showing a consistent signal across all three metrics full-phase average performance median monthly difference and cycle hit rate A single +ndash indicates a mixed or less consistent signal Return data from 1962 to 2016 Source Fidelity Investments (AART) as of 63020
Business-Cycle Approach to SectorsSector EARLY CYCLE
Economically sensitive sectors may tend to outperform while more defensive sectors have
tended to underperform
Making marginal portfolio allocation changes to manage
drawdown risk with sectorsmay enhance risk-adjusted
returns during this cycle
Defensive and inflation-resistantsectors tend to perform better
while more cyclical sectors underperform
Since performance is generally negative in
recessions investors should focus on the most defensive
historically stable sectors
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
ASSE
TM
ARKE
TS
400
420
440
460
480
500
520
540
092
094
096
098
100
102
104
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18D
ec-1
8M
ar-1
9Ju
n-19
Sep-
19D
ec-1
9M
ar-2
0Ju
n-20
Value vs Growth Performance CRB Raw Industrials Index
LEFT Gray bars represent US recessions as defined by NBER Asset classes represented by Value Fidelity Value ETF Growth Russell 1000reg
Growth Index Commodity Prices CRB Raw Industrials Index Source Federal Reserve Board NBER Haver Analytics Bloomberg Finance LP Fidelity Investments (AART) as of 63020 RIGHT Asset classes represented by Growth Russell 1000reg Growth Index Value Russell 1000reg Value Index Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020 Past performance is no guarantee of future results All indexes are unmanaged You cannot invest directly in an index Unlike mutual funds ETF shares are bought and sold at market price which may be higher or lower than their NAV and are not individually redeemed from the fund32
Value Equity More Attractive after Long UnderperformanceOn a cyclical basis the relative performance of value stocks has tended to correlate generally with the direction of the global economy and in particular with commodity prices which may be bottoming after the worldwide COVID-19 shutdown Meanwhile after a decade of trailing other leading factors and styles valuersquos relative valuations are at their most attractive in roughly 20 years
Price-to-Book Valuation SpreadsValue Relative Performance vs Commodity Prices
Ratio PB RatioIndex
0
1
2
3
4
5
6
7
8
9
10
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Growth vs Value
ASSE
TM
ARKE
TS
33
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Percentile ranks of yields and spreads based on historical period from 1993 to 2020 MBS mortgage-backed securities Source Bloomberg Barclays Bank of America Merrill Lynch JP Morgan Fidelity Investments (AART) as of 63020
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
EconomyMacro Backdrop
ECO
NO
MY
10
DYNAMIC ASSET ALLOCATION TIMELINE
Business Cycle
(10ndash30 years)Secular
HORIZONS
(1ndash10 years)
Tactical(1ndash12 months)
Portfolio ConstructionAsset Class | CountryRegion | Sectors | Correlations
For illustrative purposes only Source Fidelity Investments (AART) as of 63020
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
ECO
NO
MY
11
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 A growth recession is a significant decline in activity relative to a countryrsquos long-term economic potential We use the ldquogrowth cyclerdquo definition for most developing economies such as China because they tend to exhibit strong trend performance driven by rapid factor accumulation and increases in productivity and the deviation from the trend tends to matter most for asset returns We use the classic definition of recession involving an outright contraction in economic activity for developed economies Source Fidelity Investments (AART) as of 63020
Business Cycle Framework
ChinaUS Eurozone UK Canada Australia
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
European energy demand is reflected by a five-day moving average of daily electric loads Chinese energy demand is reflected by a seven-day moving average of daily coal consumption and US energy demand is reflected by weekly electric output The distance from average for the US and Europe is calculated as the current yearrsquos data as a percentage above or below the 2017ndash2019 weekly average The distance from average for the China is calculated as the current yearrsquos data as a percentage above or below the 2017ndash2019 daily average indexed to the Chinese New Year GDP-weighted countries in Europe include Italy Germany United Kingdom Spain Austria and France Source CCTD European Network of Transmission System Operators for Electricity Edison Electric Institute Haver Analytics Fidelity Investments (AART) as of 62820 12
Distance from Average
High-Frequency Energy Demand
-12-9-2
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
ECO
NO
MY
25
30
35
40
45
50
55
60
65
70
75
0
10
20
30
40
50
60
70
80
90
100
Dec
-05
Sep-
06Ju
n-07
Mar
-08
Dec
-08
Oct
-09
Jul-1
0Ap
r-11
Jan-
12O
ct-1
2Au
g-13
May
-14
Feb-
15N
ov-1
5Au
g-16
Jun-
17M
ar-1
8D
ec-1
8Se
p-19
Jun-
20
AART Industrial Production Diffusion IndexPMI New Export Orders
PMI Purchasing Managers Index A reading above 50 indicates the manufacturing economy is generally expanding below 50 indicates it is generally contracting AART Industrial Production Diffusion Index is a proprietary index based on industrial production data Gray bars represent China growth recessions as defined by AART LEFT Source China National Bureau of Statistics Haver Analytics Fidelity Investments (AART) AART Diffusion Index as of 53120 PMI as of 6302020 RIGHT Index values above 100 denote optimism values below 100 denote pessimism and an index value of 100 denotes neutral sentiment Source China National Bureau of Statistics Haver Analytics Fidelity Investments (AART) as of 53120 13
China Industrial Activity China Consumer Confidence Index
90
95
100
105
110
115
120
125
130
Jun-
10
Jun-
11
Jun-
12
Jun-
13
Jun-
14
Jun-
15
Jun-
16
Jun-
17
Jun-
18
Jun-
19
Jun-
20
Consumer Confidence Index
Percent of Industries in Expansion Index Value 100 = Neutral SentimentPMI
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
ECO
NO
MY
LEFT Source Census Haver Analytics Fidelity Investments (AART) as of 62720 RIGHT Workers receiving unemployment insurance ldquoWith $250rdquo is if extra benefit is reduced to that level after expiration of $600 Worker income cohorts are defined by percentiles low Income (25th percentile) middle income (50th percentile) and high income (75th percentile) Working paper ldquoUS Unemployment Insurance Replacement Rates During the Pandemicrdquo by Ganong Noel and Vavra Fidelity Investments (AART) as of 53120 14
-60
-40
-20
0
20
40
60
80
100
LowIncome
MiddleIncome
HighIncome
With $600 CARES Benefit With $250
Percent Above or Below Normal Income
Weekly Earnings of Unemployed Individuals
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
0
001
002
003
004
005
006
007
008
009
01
0
1
2
3
4
5
6
7
Jun-
07
Jun-
08
Jun-
09
Jun-
10
Jun-
11
Jun-
12
Jun-
13
Jun-
14
Jun-
15
Jun-
16
Jun-
17
Jun-
18
Jun-
19
Jun-
20
Initial Claims
Millions
US Unemployment Claims
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Conference Board Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Other industries most impacted shaded in blue include For GDP Recreation Services Autos Transportation Services Recreation Goods Clothing Gasoline Furnishings For Employment Retail Transportation Source Conference Board NBER Haver Analytics Fidelity Investments (AART) as of 2292015
Restaurants and Hotels
Leisure and Hospitality
0
5
10
15
20
25
GDP Private Employment
Largest Affected Industry Other
Sectors Most Impacted by COVID-19
Share
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Consumer Sentiment
00
1
2
3
4
5
6
7
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
2020
Consumer ExpectationsPresent Situation
Ratio
ECO
NO
MY
ldquoFastrdquo reopening states include Arizona Florida Georgia and Texas ldquoSlowrdquo reopening states include Massachusetts New York and New Jersey LEFT Source Johns Hopkins University Haver Analytics Fidelity Investments (AART) as of 7320 RIGHT Baseline is defined as the median for that day of the week during the period 1420ndash13120 Source OpenTable Homebase Haver Analytics Fidelity Investments (AART) as of 62620
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
Hours Worked byEmployees
Local BusinessesOpen
OpenTableReservations YoY
April Trough 62620 61820
Cases (Five Day Moving Average)
New COVID-19 Cases Daily Data in ldquoFastrdquo Reopening States
Hours and Businesses (0 = Baseline) Year-Over-Year
16
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
0
1000
2000
3000
4000
5000
6000
7000
8000
33
203
102
03
172
03
242
03
312
04
720
414
20
421
20
428
20
55
205
122
05
192
05
262
06
220
69
206
162
06
232
06
302
0
Fast Reopening States Slow Reopening States
ECO
NO
MY
-30
-20
-10
0
10
20
30
Jun-19 Sep-19 Dec-19 Mar-20 Jun-20
2020 2021
40
50
60
70
80
90
100
110
120
-12 -9 -6 -3 0 3 6 9 12 15 18 21 24 27 30 33 36
Months (t=0 is start of recession)
Average since 1980 2007ndash20082020ndash22 Consensus Estimate
LEFT AND RIGHT EPS Earnings per share Past performance is no guarantee of future results Source Bloomberg Finance LP Fidelity Investments (AART) Haver Analytics as of 6252017
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
ECO
NO
MY
050
075
100
125
150
175
200
225
250
275
ClevelandFed
AtlantaFed
New YorkFed
CoreCPI
May-2020 Dec-2019
LEFT CPI Consumer Price Index Core CPI excludes Food and Energy Cleveland Fed Cleveland 16 Trimmed Mean CPI Atlanta Fed StickyCPI New York Fed Underlying Inflation Gauge Source Federal Reserve Board Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GFC Global Financial Crisis Inflation curves derived from Inflation swaps Source Bloomberg Financial Fidelity Investments (AART) as of 6302018
Measures of US Inflation
Year-Over-Year
050
075
100
125
150
175
200
225
250
275
1 2 3 4 5 6 7 8 9 10 20 30Years
Expected CPI Year-Over-Year
US Inflation Expectations
June 2010
June 2020
GFC
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Federal Reserve Board NBER Bureau of Economic Analysis Haver Analytics Fidelity Investments (AART) as of 33120 RIGHT The 50 of households with the lowest incomes Source Federal Reserve Board Bureau of Economic Analysis World Inequality Data Haver Analytics Fidelity Investments (AART) as of 12311819
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
0
0
0
0
0
0
0
0
0
0
0
70
75
80
85
90
95
100
105
1993 1996 1999 2002 2005 2008 2011 2014 2017 2020
Non-Financial Corporate CreditRevenues
12
13
14
15
16
17
18
19
20
21
300
350
400
450
500
550
600
1976 1981 1986 1991 1996 2001 2006 2011 2016
Financial Assets Bottom 50 Household Income
Household Financial Assets and Income
Share of Household Income
US Corporate Debt
Ratio Share of Disposable Income
ECO
NO
MY
-$1000
$0
$1000
$2000
$3000
$4000
$5000
May
-201
1
Nov
-201
1
May
-201
2
Nov
-201
2
May
-201
3
Nov
-201
3
May
-201
4
Nov
-201
4
May
-201
5
Nov
-201
5
May
-201
6
Nov
-201
6
May
-201
7
Nov
-201
7
May
-201
8
Nov
-201
8
May
-201
9
Nov
-201
9
May
-202
0
UK Japan Eurozone US Total
20
Billions (12-Month Change)
QE Quantitative Easing Source Federal Reserve Bank of Japan European Central Bank Bank of England Haver Analytics Fidelity Investments (AART) as of 53120
Central Bank Balance Sheets
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
ECO
NO
MY
-20
-15
-10
-5
0
5
10
-100
-075
-050
-025
000
025
050
075
100
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
State and Local Government Federal Government Federal Budget Deficit
Source CBO BEA Haver Analytics 2020 and 2021 Budget Deficits are CBO projections (httpswwwcbogovsystemfiles2020-0456344-CBO-presentationpdf ) Fidelity Investments (AART) 21
Percent of GDP
US Federal Fiscal Deficit and Government Impact on GDP
Contribution to GDP
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
ECO
NO
MY
22 Ag Agriculture FDI Foreign direct investment ADR American depositary receipt Source Fidelity Investments (AART) as of 63020
US-China Relationship
Geopolitical Rivalry
Trade
Industrial Policy Issuesbull IT sectorbull Health carebull Supply chains
Strategic Competition
Policy Tools of De-Globalization
Military Hegemony
in Asia
Economic Advantage in
Key Areas
Consumer and Other
Goods
Bilateral Flashpointsbull Hong Kongbull Detention campsbull Taiwanbull South China Sea
Policy Action Categories Example
TariffTrade Barriers Raise tariffs to reduce imports
Export and FDI Restrictions Curtail high-tech exports
Industrial Policies Mandate supply chainonshoring
ImmigrationHuman Mobility Tighter borders
Financial Restrictions Penalties
US sanctions tax policies
InfoData Restrictions Chinas firewall
Portfolio Investment Restrictions
US de-lists Chinese ADRs
Politicized Debt Action Selective US default
BroadEconomic
Investment
TariffsMarket Accessbull Phase 1 ag deal
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
ECO
NO
MY
Risks
23
Business Cycle
Asset Allocation Implications
US is in process of emerging from a brief but sharp recession
Policymakers providing abundant support to markets and economy
Emphasize focus on diversified anddisciplined investment strategies
Members hold a wide range of views but see opportunities within asset classes
Opportunities include non-US assets US small cap and value equities TIPS and gold
For illustrative purposes only Diversification does not ensure a profit or guarantee against a loss Source Fidelity Investments (AART) as of 63020
The recovery remains highly uncertain given the size and exogenous nature of
the COVID shock
Policy actions are playing a larger role in driving financial market performance than
in past cycles
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
ASSE
TM
ARKE
TS
EM Emerging Markets EMEA Europe the Middle East and Africa For indexes and other important information used to represent above asset categories see Appendix Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged Sector returns represented by SampP 500 sectors Sector investing involves risk Because of its narrow focus sector investing may be more volatile than investing in more diversified baskets of securities Source Bloomberg Finance LP Fidelity Investments (AART) as of 6302025
US Equity Styles Total ReturnInternational Equities and Global Assets Total Return
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
For illustrative purposes only Past performance is no guarantee of future results Diversification does not ensure a profit or guarantee against a loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Fidelity proprietary analysis based on Monte Carlo simulations using historical index returns Domestic Equity Dow Jones US Total Stock Market Index Foreign Equity MSCI ACWI ex USA Index Investment Grade (IG) Bonds Bloomberg Barclays US Aggregate Bond Index High Yield (HY) Bonds ICE BofA US High Yield Index Source Fidelity Investments Morningstar Bloomberg Barclays data as of 63020
-10
-5
0
5
10
15
20
25
Early Mid Late Recession
US Stocks IG Bonds Cash
Annualized Real ReturnAnnualized Nominal Return
75th
percentile
25th
percentile
Median
Asset Class Performance by Cycle Phase (1950ndash2018)
10-Year Portfolio Return Distribution by Cycle Phase Starting Point
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
ASSE
TM
ARKE
TS
-40
-30
-20
-10
0
10
20
30
40
Jun-
12
Sep-
12
Dec
-12
Mar
-13
Jun-
13
Sep-
13
Dec
-13
Mar
-14
Jun-
14
Sep-
14
Dec
-14
Mar
-15
Jun-
15
Sep-
15
Dec
-15
Mar
-16
Jun-
16
Sep-
16
Dec
-16
Mar
-17
Jun-
17
Sep-
17
Dec
-17
Mar
-18
Jun-
18
Sep-
18
Dec
-18
Mar
-19
Jun-
19
Sep-
19
Dec
-19
Mar
-20
Jun-
20
EM DM US
27Past performance is no guarantee of future results DM Developed Markets EM Emerging Markets EPS Earnings per share Forward EPS Next 12 months expectations Source MSCI Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Global EPS Growth (Trailing 12 Months)
Forward EPS
53
01-49
Percent
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
ASSE
TM
ARKE
TS
0
5
10
15
20
25
2005 2008 2011 2014 2017 2020
DM Trailing PE EM Trailing PE US Trailing PE Forward PE
28
DM Non-US Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Price-to-earnings ratio (PE) stock price divided by earnings per share Also known as the multiple PE gives investors an idea of how much they are paying for a companyrsquos earnings power Long-term average PE for Emerging Markets includes data for 1988ndash2017 for Non-US Developed Markets 1973ndash2016 for the United States 1926ndash2017 Indexes DMmdashMSCI EAFE Index EMmdashMSCI EM Index United StatesmdashSampP 500 Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
EM
US
DM
DM Long-Term Average
US Long-Term Average
EM Long-Term Average
Global Stock Market PE Ratios
Ratio
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
ASSE
TM
ARKE
TS
0
10
20
30
40
50
60
70
80
90
100
Rus
sia
Turk
eySp
ain
Sout
h Ko
rea
UK
Indo
nesi
aC
hina
Aust
ralia EM
Braz
ilIta
lyM
exic
oG
erm
any
Philip
pine
sD
MFr
ance
Can
ada
Japa
nIn
dia
US
-35
-30
-25
-20
-15
-10
-5
0
5
10
GBP JPY CAD EUR CNY
29
DM Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information LEFT Price-to-earnings (PE) ratio (or multiple) stock price divided by earnings per share which indicates how much investors are paying for a companyrsquos earnings power Cyclically adjusted earnings are 10-year averages adjusted for inflation Source FactSet countriesrsquo statistical organizations Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GBPmdashBritish pound JPYmdashJapanese yen CADmdashCanadian dollar EURmdasheuro CNYmdashChinese yuanSource Federal Reserve Board Haver Analytics Fidelity Investments (AART) as of 63020
53120 20-Year Range
Valuation of Real Exchange Rates
Expensive vs $
Cheap vs $
Shiller CAPE
Last 12-Month Range 63020
Cyclically Adjusted PEs Valuation of Major Currencies vs USD
Non-US Equity and Forex Valuations Relatively AttractiveCyclically adjusted PE (CAPE) ratios for international developed-market and emerging-market equities remained below US valuations providing a relatively favorable long-term backdrop for non-US stocks In Q2 the US dollar depreciated against many of the worldrsquos major currencies nevertheless US dollar valuations remain relatively expensive overall
ASSE
TM
ARKE
TS
LEFT TIPS Treasury Inflation-Protected Securities SOURCE Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Source CME Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 6302030
00
05
10
15
20
25
30
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
10 Year LT Average (Since 1998)
US Treasury Breakeven Inflation Rates
Yield
$0
$20
$40
$60
$80
$100
$120
$140
$160
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
WTI Crude Oil
Inflation Adjusted Price (March 2020 Dollars)
Real Oil Price
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
ASSE
TM
ARKE
TS
31
Past performance is no guarantee of future results Sectors as defined by GICS White line is a theoretical representation of the business cycle as it moves through early mid late and recession phases Green and red shaded portions above respectively represent over- or underperformance relative to the broader market unshaded (white) portions suggest no clear pattern of over- or underperformance Double +ndash signs indicate that the sector is showing a consistent signal across all three metrics full-phase average performance median monthly difference and cycle hit rate A single +ndash indicates a mixed or less consistent signal Return data from 1962 to 2016 Source Fidelity Investments (AART) as of 63020
Business-Cycle Approach to SectorsSector EARLY CYCLE
Economically sensitive sectors may tend to outperform while more defensive sectors have
tended to underperform
Making marginal portfolio allocation changes to manage
drawdown risk with sectorsmay enhance risk-adjusted
returns during this cycle
Defensive and inflation-resistantsectors tend to perform better
while more cyclical sectors underperform
Since performance is generally negative in
recessions investors should focus on the most defensive
historically stable sectors
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
ASSE
TM
ARKE
TS
400
420
440
460
480
500
520
540
092
094
096
098
100
102
104
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18D
ec-1
8M
ar-1
9Ju
n-19
Sep-
19D
ec-1
9M
ar-2
0Ju
n-20
Value vs Growth Performance CRB Raw Industrials Index
LEFT Gray bars represent US recessions as defined by NBER Asset classes represented by Value Fidelity Value ETF Growth Russell 1000reg
Growth Index Commodity Prices CRB Raw Industrials Index Source Federal Reserve Board NBER Haver Analytics Bloomberg Finance LP Fidelity Investments (AART) as of 63020 RIGHT Asset classes represented by Growth Russell 1000reg Growth Index Value Russell 1000reg Value Index Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020 Past performance is no guarantee of future results All indexes are unmanaged You cannot invest directly in an index Unlike mutual funds ETF shares are bought and sold at market price which may be higher or lower than their NAV and are not individually redeemed from the fund32
Value Equity More Attractive after Long UnderperformanceOn a cyclical basis the relative performance of value stocks has tended to correlate generally with the direction of the global economy and in particular with commodity prices which may be bottoming after the worldwide COVID-19 shutdown Meanwhile after a decade of trailing other leading factors and styles valuersquos relative valuations are at their most attractive in roughly 20 years
Price-to-Book Valuation SpreadsValue Relative Performance vs Commodity Prices
Ratio PB RatioIndex
0
1
2
3
4
5
6
7
8
9
10
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Growth vs Value
ASSE
TM
ARKE
TS
33
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Percentile ranks of yields and spreads based on historical period from 1993 to 2020 MBS mortgage-backed securities Source Bloomberg Barclays Bank of America Merrill Lynch JP Morgan Fidelity Investments (AART) as of 63020
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
ECO
NO
MY
10
DYNAMIC ASSET ALLOCATION TIMELINE
Business Cycle
(10ndash30 years)Secular
HORIZONS
(1ndash10 years)
Tactical(1ndash12 months)
Portfolio ConstructionAsset Class | CountryRegion | Sectors | Correlations
For illustrative purposes only Source Fidelity Investments (AART) as of 63020
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
ECO
NO
MY
11
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 A growth recession is a significant decline in activity relative to a countryrsquos long-term economic potential We use the ldquogrowth cyclerdquo definition for most developing economies such as China because they tend to exhibit strong trend performance driven by rapid factor accumulation and increases in productivity and the deviation from the trend tends to matter most for asset returns We use the classic definition of recession involving an outright contraction in economic activity for developed economies Source Fidelity Investments (AART) as of 63020
Business Cycle Framework
ChinaUS Eurozone UK Canada Australia
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
European energy demand is reflected by a five-day moving average of daily electric loads Chinese energy demand is reflected by a seven-day moving average of daily coal consumption and US energy demand is reflected by weekly electric output The distance from average for the US and Europe is calculated as the current yearrsquos data as a percentage above or below the 2017ndash2019 weekly average The distance from average for the China is calculated as the current yearrsquos data as a percentage above or below the 2017ndash2019 daily average indexed to the Chinese New Year GDP-weighted countries in Europe include Italy Germany United Kingdom Spain Austria and France Source CCTD European Network of Transmission System Operators for Electricity Edison Electric Institute Haver Analytics Fidelity Investments (AART) as of 62820 12
Distance from Average
High-Frequency Energy Demand
-12-9-2
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
ECO
NO
MY
25
30
35
40
45
50
55
60
65
70
75
0
10
20
30
40
50
60
70
80
90
100
Dec
-05
Sep-
06Ju
n-07
Mar
-08
Dec
-08
Oct
-09
Jul-1
0Ap
r-11
Jan-
12O
ct-1
2Au
g-13
May
-14
Feb-
15N
ov-1
5Au
g-16
Jun-
17M
ar-1
8D
ec-1
8Se
p-19
Jun-
20
AART Industrial Production Diffusion IndexPMI New Export Orders
PMI Purchasing Managers Index A reading above 50 indicates the manufacturing economy is generally expanding below 50 indicates it is generally contracting AART Industrial Production Diffusion Index is a proprietary index based on industrial production data Gray bars represent China growth recessions as defined by AART LEFT Source China National Bureau of Statistics Haver Analytics Fidelity Investments (AART) AART Diffusion Index as of 53120 PMI as of 6302020 RIGHT Index values above 100 denote optimism values below 100 denote pessimism and an index value of 100 denotes neutral sentiment Source China National Bureau of Statistics Haver Analytics Fidelity Investments (AART) as of 53120 13
China Industrial Activity China Consumer Confidence Index
90
95
100
105
110
115
120
125
130
Jun-
10
Jun-
11
Jun-
12
Jun-
13
Jun-
14
Jun-
15
Jun-
16
Jun-
17
Jun-
18
Jun-
19
Jun-
20
Consumer Confidence Index
Percent of Industries in Expansion Index Value 100 = Neutral SentimentPMI
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
ECO
NO
MY
LEFT Source Census Haver Analytics Fidelity Investments (AART) as of 62720 RIGHT Workers receiving unemployment insurance ldquoWith $250rdquo is if extra benefit is reduced to that level after expiration of $600 Worker income cohorts are defined by percentiles low Income (25th percentile) middle income (50th percentile) and high income (75th percentile) Working paper ldquoUS Unemployment Insurance Replacement Rates During the Pandemicrdquo by Ganong Noel and Vavra Fidelity Investments (AART) as of 53120 14
-60
-40
-20
0
20
40
60
80
100
LowIncome
MiddleIncome
HighIncome
With $600 CARES Benefit With $250
Percent Above or Below Normal Income
Weekly Earnings of Unemployed Individuals
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
0
001
002
003
004
005
006
007
008
009
01
0
1
2
3
4
5
6
7
Jun-
07
Jun-
08
Jun-
09
Jun-
10
Jun-
11
Jun-
12
Jun-
13
Jun-
14
Jun-
15
Jun-
16
Jun-
17
Jun-
18
Jun-
19
Jun-
20
Initial Claims
Millions
US Unemployment Claims
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Conference Board Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Other industries most impacted shaded in blue include For GDP Recreation Services Autos Transportation Services Recreation Goods Clothing Gasoline Furnishings For Employment Retail Transportation Source Conference Board NBER Haver Analytics Fidelity Investments (AART) as of 2292015
Restaurants and Hotels
Leisure and Hospitality
0
5
10
15
20
25
GDP Private Employment
Largest Affected Industry Other
Sectors Most Impacted by COVID-19
Share
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Consumer Sentiment
00
1
2
3
4
5
6
7
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
2020
Consumer ExpectationsPresent Situation
Ratio
ECO
NO
MY
ldquoFastrdquo reopening states include Arizona Florida Georgia and Texas ldquoSlowrdquo reopening states include Massachusetts New York and New Jersey LEFT Source Johns Hopkins University Haver Analytics Fidelity Investments (AART) as of 7320 RIGHT Baseline is defined as the median for that day of the week during the period 1420ndash13120 Source OpenTable Homebase Haver Analytics Fidelity Investments (AART) as of 62620
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
Hours Worked byEmployees
Local BusinessesOpen
OpenTableReservations YoY
April Trough 62620 61820
Cases (Five Day Moving Average)
New COVID-19 Cases Daily Data in ldquoFastrdquo Reopening States
Hours and Businesses (0 = Baseline) Year-Over-Year
16
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
0
1000
2000
3000
4000
5000
6000
7000
8000
33
203
102
03
172
03
242
03
312
04
720
414
20
421
20
428
20
55
205
122
05
192
05
262
06
220
69
206
162
06
232
06
302
0
Fast Reopening States Slow Reopening States
ECO
NO
MY
-30
-20
-10
0
10
20
30
Jun-19 Sep-19 Dec-19 Mar-20 Jun-20
2020 2021
40
50
60
70
80
90
100
110
120
-12 -9 -6 -3 0 3 6 9 12 15 18 21 24 27 30 33 36
Months (t=0 is start of recession)
Average since 1980 2007ndash20082020ndash22 Consensus Estimate
LEFT AND RIGHT EPS Earnings per share Past performance is no guarantee of future results Source Bloomberg Finance LP Fidelity Investments (AART) Haver Analytics as of 6252017
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
ECO
NO
MY
050
075
100
125
150
175
200
225
250
275
ClevelandFed
AtlantaFed
New YorkFed
CoreCPI
May-2020 Dec-2019
LEFT CPI Consumer Price Index Core CPI excludes Food and Energy Cleveland Fed Cleveland 16 Trimmed Mean CPI Atlanta Fed StickyCPI New York Fed Underlying Inflation Gauge Source Federal Reserve Board Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GFC Global Financial Crisis Inflation curves derived from Inflation swaps Source Bloomberg Financial Fidelity Investments (AART) as of 6302018
Measures of US Inflation
Year-Over-Year
050
075
100
125
150
175
200
225
250
275
1 2 3 4 5 6 7 8 9 10 20 30Years
Expected CPI Year-Over-Year
US Inflation Expectations
June 2010
June 2020
GFC
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Federal Reserve Board NBER Bureau of Economic Analysis Haver Analytics Fidelity Investments (AART) as of 33120 RIGHT The 50 of households with the lowest incomes Source Federal Reserve Board Bureau of Economic Analysis World Inequality Data Haver Analytics Fidelity Investments (AART) as of 12311819
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
0
0
0
0
0
0
0
0
0
0
0
70
75
80
85
90
95
100
105
1993 1996 1999 2002 2005 2008 2011 2014 2017 2020
Non-Financial Corporate CreditRevenues
12
13
14
15
16
17
18
19
20
21
300
350
400
450
500
550
600
1976 1981 1986 1991 1996 2001 2006 2011 2016
Financial Assets Bottom 50 Household Income
Household Financial Assets and Income
Share of Household Income
US Corporate Debt
Ratio Share of Disposable Income
ECO
NO
MY
-$1000
$0
$1000
$2000
$3000
$4000
$5000
May
-201
1
Nov
-201
1
May
-201
2
Nov
-201
2
May
-201
3
Nov
-201
3
May
-201
4
Nov
-201
4
May
-201
5
Nov
-201
5
May
-201
6
Nov
-201
6
May
-201
7
Nov
-201
7
May
-201
8
Nov
-201
8
May
-201
9
Nov
-201
9
May
-202
0
UK Japan Eurozone US Total
20
Billions (12-Month Change)
QE Quantitative Easing Source Federal Reserve Bank of Japan European Central Bank Bank of England Haver Analytics Fidelity Investments (AART) as of 53120
Central Bank Balance Sheets
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
ECO
NO
MY
-20
-15
-10
-5
0
5
10
-100
-075
-050
-025
000
025
050
075
100
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
State and Local Government Federal Government Federal Budget Deficit
Source CBO BEA Haver Analytics 2020 and 2021 Budget Deficits are CBO projections (httpswwwcbogovsystemfiles2020-0456344-CBO-presentationpdf ) Fidelity Investments (AART) 21
Percent of GDP
US Federal Fiscal Deficit and Government Impact on GDP
Contribution to GDP
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
ECO
NO
MY
22 Ag Agriculture FDI Foreign direct investment ADR American depositary receipt Source Fidelity Investments (AART) as of 63020
US-China Relationship
Geopolitical Rivalry
Trade
Industrial Policy Issuesbull IT sectorbull Health carebull Supply chains
Strategic Competition
Policy Tools of De-Globalization
Military Hegemony
in Asia
Economic Advantage in
Key Areas
Consumer and Other
Goods
Bilateral Flashpointsbull Hong Kongbull Detention campsbull Taiwanbull South China Sea
Policy Action Categories Example
TariffTrade Barriers Raise tariffs to reduce imports
Export and FDI Restrictions Curtail high-tech exports
Industrial Policies Mandate supply chainonshoring
ImmigrationHuman Mobility Tighter borders
Financial Restrictions Penalties
US sanctions tax policies
InfoData Restrictions Chinas firewall
Portfolio Investment Restrictions
US de-lists Chinese ADRs
Politicized Debt Action Selective US default
BroadEconomic
Investment
TariffsMarket Accessbull Phase 1 ag deal
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
ECO
NO
MY
Risks
23
Business Cycle
Asset Allocation Implications
US is in process of emerging from a brief but sharp recession
Policymakers providing abundant support to markets and economy
Emphasize focus on diversified anddisciplined investment strategies
Members hold a wide range of views but see opportunities within asset classes
Opportunities include non-US assets US small cap and value equities TIPS and gold
For illustrative purposes only Diversification does not ensure a profit or guarantee against a loss Source Fidelity Investments (AART) as of 63020
The recovery remains highly uncertain given the size and exogenous nature of
the COVID shock
Policy actions are playing a larger role in driving financial market performance than
in past cycles
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
ASSE
TM
ARKE
TS
EM Emerging Markets EMEA Europe the Middle East and Africa For indexes and other important information used to represent above asset categories see Appendix Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged Sector returns represented by SampP 500 sectors Sector investing involves risk Because of its narrow focus sector investing may be more volatile than investing in more diversified baskets of securities Source Bloomberg Finance LP Fidelity Investments (AART) as of 6302025
US Equity Styles Total ReturnInternational Equities and Global Assets Total Return
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
For illustrative purposes only Past performance is no guarantee of future results Diversification does not ensure a profit or guarantee against a loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Fidelity proprietary analysis based on Monte Carlo simulations using historical index returns Domestic Equity Dow Jones US Total Stock Market Index Foreign Equity MSCI ACWI ex USA Index Investment Grade (IG) Bonds Bloomberg Barclays US Aggregate Bond Index High Yield (HY) Bonds ICE BofA US High Yield Index Source Fidelity Investments Morningstar Bloomberg Barclays data as of 63020
-10
-5
0
5
10
15
20
25
Early Mid Late Recession
US Stocks IG Bonds Cash
Annualized Real ReturnAnnualized Nominal Return
75th
percentile
25th
percentile
Median
Asset Class Performance by Cycle Phase (1950ndash2018)
10-Year Portfolio Return Distribution by Cycle Phase Starting Point
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
ASSE
TM
ARKE
TS
-40
-30
-20
-10
0
10
20
30
40
Jun-
12
Sep-
12
Dec
-12
Mar
-13
Jun-
13
Sep-
13
Dec
-13
Mar
-14
Jun-
14
Sep-
14
Dec
-14
Mar
-15
Jun-
15
Sep-
15
Dec
-15
Mar
-16
Jun-
16
Sep-
16
Dec
-16
Mar
-17
Jun-
17
Sep-
17
Dec
-17
Mar
-18
Jun-
18
Sep-
18
Dec
-18
Mar
-19
Jun-
19
Sep-
19
Dec
-19
Mar
-20
Jun-
20
EM DM US
27Past performance is no guarantee of future results DM Developed Markets EM Emerging Markets EPS Earnings per share Forward EPS Next 12 months expectations Source MSCI Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Global EPS Growth (Trailing 12 Months)
Forward EPS
53
01-49
Percent
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
ASSE
TM
ARKE
TS
0
5
10
15
20
25
2005 2008 2011 2014 2017 2020
DM Trailing PE EM Trailing PE US Trailing PE Forward PE
28
DM Non-US Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Price-to-earnings ratio (PE) stock price divided by earnings per share Also known as the multiple PE gives investors an idea of how much they are paying for a companyrsquos earnings power Long-term average PE for Emerging Markets includes data for 1988ndash2017 for Non-US Developed Markets 1973ndash2016 for the United States 1926ndash2017 Indexes DMmdashMSCI EAFE Index EMmdashMSCI EM Index United StatesmdashSampP 500 Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
EM
US
DM
DM Long-Term Average
US Long-Term Average
EM Long-Term Average
Global Stock Market PE Ratios
Ratio
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
ASSE
TM
ARKE
TS
0
10
20
30
40
50
60
70
80
90
100
Rus
sia
Turk
eySp
ain
Sout
h Ko
rea
UK
Indo
nesi
aC
hina
Aust
ralia EM
Braz
ilIta
lyM
exic
oG
erm
any
Philip
pine
sD
MFr
ance
Can
ada
Japa
nIn
dia
US
-35
-30
-25
-20
-15
-10
-5
0
5
10
GBP JPY CAD EUR CNY
29
DM Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information LEFT Price-to-earnings (PE) ratio (or multiple) stock price divided by earnings per share which indicates how much investors are paying for a companyrsquos earnings power Cyclically adjusted earnings are 10-year averages adjusted for inflation Source FactSet countriesrsquo statistical organizations Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GBPmdashBritish pound JPYmdashJapanese yen CADmdashCanadian dollar EURmdasheuro CNYmdashChinese yuanSource Federal Reserve Board Haver Analytics Fidelity Investments (AART) as of 63020
53120 20-Year Range
Valuation of Real Exchange Rates
Expensive vs $
Cheap vs $
Shiller CAPE
Last 12-Month Range 63020
Cyclically Adjusted PEs Valuation of Major Currencies vs USD
Non-US Equity and Forex Valuations Relatively AttractiveCyclically adjusted PE (CAPE) ratios for international developed-market and emerging-market equities remained below US valuations providing a relatively favorable long-term backdrop for non-US stocks In Q2 the US dollar depreciated against many of the worldrsquos major currencies nevertheless US dollar valuations remain relatively expensive overall
ASSE
TM
ARKE
TS
LEFT TIPS Treasury Inflation-Protected Securities SOURCE Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Source CME Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 6302030
00
05
10
15
20
25
30
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
10 Year LT Average (Since 1998)
US Treasury Breakeven Inflation Rates
Yield
$0
$20
$40
$60
$80
$100
$120
$140
$160
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
WTI Crude Oil
Inflation Adjusted Price (March 2020 Dollars)
Real Oil Price
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
ASSE
TM
ARKE
TS
31
Past performance is no guarantee of future results Sectors as defined by GICS White line is a theoretical representation of the business cycle as it moves through early mid late and recession phases Green and red shaded portions above respectively represent over- or underperformance relative to the broader market unshaded (white) portions suggest no clear pattern of over- or underperformance Double +ndash signs indicate that the sector is showing a consistent signal across all three metrics full-phase average performance median monthly difference and cycle hit rate A single +ndash indicates a mixed or less consistent signal Return data from 1962 to 2016 Source Fidelity Investments (AART) as of 63020
Business-Cycle Approach to SectorsSector EARLY CYCLE
Economically sensitive sectors may tend to outperform while more defensive sectors have
tended to underperform
Making marginal portfolio allocation changes to manage
drawdown risk with sectorsmay enhance risk-adjusted
returns during this cycle
Defensive and inflation-resistantsectors tend to perform better
while more cyclical sectors underperform
Since performance is generally negative in
recessions investors should focus on the most defensive
historically stable sectors
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
ASSE
TM
ARKE
TS
400
420
440
460
480
500
520
540
092
094
096
098
100
102
104
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18D
ec-1
8M
ar-1
9Ju
n-19
Sep-
19D
ec-1
9M
ar-2
0Ju
n-20
Value vs Growth Performance CRB Raw Industrials Index
LEFT Gray bars represent US recessions as defined by NBER Asset classes represented by Value Fidelity Value ETF Growth Russell 1000reg
Growth Index Commodity Prices CRB Raw Industrials Index Source Federal Reserve Board NBER Haver Analytics Bloomberg Finance LP Fidelity Investments (AART) as of 63020 RIGHT Asset classes represented by Growth Russell 1000reg Growth Index Value Russell 1000reg Value Index Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020 Past performance is no guarantee of future results All indexes are unmanaged You cannot invest directly in an index Unlike mutual funds ETF shares are bought and sold at market price which may be higher or lower than their NAV and are not individually redeemed from the fund32
Value Equity More Attractive after Long UnderperformanceOn a cyclical basis the relative performance of value stocks has tended to correlate generally with the direction of the global economy and in particular with commodity prices which may be bottoming after the worldwide COVID-19 shutdown Meanwhile after a decade of trailing other leading factors and styles valuersquos relative valuations are at their most attractive in roughly 20 years
Price-to-Book Valuation SpreadsValue Relative Performance vs Commodity Prices
Ratio PB RatioIndex
0
1
2
3
4
5
6
7
8
9
10
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Growth vs Value
ASSE
TM
ARKE
TS
33
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Percentile ranks of yields and spreads based on historical period from 1993 to 2020 MBS mortgage-backed securities Source Bloomberg Barclays Bank of America Merrill Lynch JP Morgan Fidelity Investments (AART) as of 63020
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
ECO
NO
MY
11
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 A growth recession is a significant decline in activity relative to a countryrsquos long-term economic potential We use the ldquogrowth cyclerdquo definition for most developing economies such as China because they tend to exhibit strong trend performance driven by rapid factor accumulation and increases in productivity and the deviation from the trend tends to matter most for asset returns We use the classic definition of recession involving an outright contraction in economic activity for developed economies Source Fidelity Investments (AART) as of 63020
Business Cycle Framework
ChinaUS Eurozone UK Canada Australia
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
European energy demand is reflected by a five-day moving average of daily electric loads Chinese energy demand is reflected by a seven-day moving average of daily coal consumption and US energy demand is reflected by weekly electric output The distance from average for the US and Europe is calculated as the current yearrsquos data as a percentage above or below the 2017ndash2019 weekly average The distance from average for the China is calculated as the current yearrsquos data as a percentage above or below the 2017ndash2019 daily average indexed to the Chinese New Year GDP-weighted countries in Europe include Italy Germany United Kingdom Spain Austria and France Source CCTD European Network of Transmission System Operators for Electricity Edison Electric Institute Haver Analytics Fidelity Investments (AART) as of 62820 12
Distance from Average
High-Frequency Energy Demand
-12-9-2
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
ECO
NO
MY
25
30
35
40
45
50
55
60
65
70
75
0
10
20
30
40
50
60
70
80
90
100
Dec
-05
Sep-
06Ju
n-07
Mar
-08
Dec
-08
Oct
-09
Jul-1
0Ap
r-11
Jan-
12O
ct-1
2Au
g-13
May
-14
Feb-
15N
ov-1
5Au
g-16
Jun-
17M
ar-1
8D
ec-1
8Se
p-19
Jun-
20
AART Industrial Production Diffusion IndexPMI New Export Orders
PMI Purchasing Managers Index A reading above 50 indicates the manufacturing economy is generally expanding below 50 indicates it is generally contracting AART Industrial Production Diffusion Index is a proprietary index based on industrial production data Gray bars represent China growth recessions as defined by AART LEFT Source China National Bureau of Statistics Haver Analytics Fidelity Investments (AART) AART Diffusion Index as of 53120 PMI as of 6302020 RIGHT Index values above 100 denote optimism values below 100 denote pessimism and an index value of 100 denotes neutral sentiment Source China National Bureau of Statistics Haver Analytics Fidelity Investments (AART) as of 53120 13
China Industrial Activity China Consumer Confidence Index
90
95
100
105
110
115
120
125
130
Jun-
10
Jun-
11
Jun-
12
Jun-
13
Jun-
14
Jun-
15
Jun-
16
Jun-
17
Jun-
18
Jun-
19
Jun-
20
Consumer Confidence Index
Percent of Industries in Expansion Index Value 100 = Neutral SentimentPMI
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
ECO
NO
MY
LEFT Source Census Haver Analytics Fidelity Investments (AART) as of 62720 RIGHT Workers receiving unemployment insurance ldquoWith $250rdquo is if extra benefit is reduced to that level after expiration of $600 Worker income cohorts are defined by percentiles low Income (25th percentile) middle income (50th percentile) and high income (75th percentile) Working paper ldquoUS Unemployment Insurance Replacement Rates During the Pandemicrdquo by Ganong Noel and Vavra Fidelity Investments (AART) as of 53120 14
-60
-40
-20
0
20
40
60
80
100
LowIncome
MiddleIncome
HighIncome
With $600 CARES Benefit With $250
Percent Above or Below Normal Income
Weekly Earnings of Unemployed Individuals
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
0
001
002
003
004
005
006
007
008
009
01
0
1
2
3
4
5
6
7
Jun-
07
Jun-
08
Jun-
09
Jun-
10
Jun-
11
Jun-
12
Jun-
13
Jun-
14
Jun-
15
Jun-
16
Jun-
17
Jun-
18
Jun-
19
Jun-
20
Initial Claims
Millions
US Unemployment Claims
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Conference Board Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Other industries most impacted shaded in blue include For GDP Recreation Services Autos Transportation Services Recreation Goods Clothing Gasoline Furnishings For Employment Retail Transportation Source Conference Board NBER Haver Analytics Fidelity Investments (AART) as of 2292015
Restaurants and Hotels
Leisure and Hospitality
0
5
10
15
20
25
GDP Private Employment
Largest Affected Industry Other
Sectors Most Impacted by COVID-19
Share
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Consumer Sentiment
00
1
2
3
4
5
6
7
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
2020
Consumer ExpectationsPresent Situation
Ratio
ECO
NO
MY
ldquoFastrdquo reopening states include Arizona Florida Georgia and Texas ldquoSlowrdquo reopening states include Massachusetts New York and New Jersey LEFT Source Johns Hopkins University Haver Analytics Fidelity Investments (AART) as of 7320 RIGHT Baseline is defined as the median for that day of the week during the period 1420ndash13120 Source OpenTable Homebase Haver Analytics Fidelity Investments (AART) as of 62620
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
Hours Worked byEmployees
Local BusinessesOpen
OpenTableReservations YoY
April Trough 62620 61820
Cases (Five Day Moving Average)
New COVID-19 Cases Daily Data in ldquoFastrdquo Reopening States
Hours and Businesses (0 = Baseline) Year-Over-Year
16
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
0
1000
2000
3000
4000
5000
6000
7000
8000
33
203
102
03
172
03
242
03
312
04
720
414
20
421
20
428
20
55
205
122
05
192
05
262
06
220
69
206
162
06
232
06
302
0
Fast Reopening States Slow Reopening States
ECO
NO
MY
-30
-20
-10
0
10
20
30
Jun-19 Sep-19 Dec-19 Mar-20 Jun-20
2020 2021
40
50
60
70
80
90
100
110
120
-12 -9 -6 -3 0 3 6 9 12 15 18 21 24 27 30 33 36
Months (t=0 is start of recession)
Average since 1980 2007ndash20082020ndash22 Consensus Estimate
LEFT AND RIGHT EPS Earnings per share Past performance is no guarantee of future results Source Bloomberg Finance LP Fidelity Investments (AART) Haver Analytics as of 6252017
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
ECO
NO
MY
050
075
100
125
150
175
200
225
250
275
ClevelandFed
AtlantaFed
New YorkFed
CoreCPI
May-2020 Dec-2019
LEFT CPI Consumer Price Index Core CPI excludes Food and Energy Cleveland Fed Cleveland 16 Trimmed Mean CPI Atlanta Fed StickyCPI New York Fed Underlying Inflation Gauge Source Federal Reserve Board Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GFC Global Financial Crisis Inflation curves derived from Inflation swaps Source Bloomberg Financial Fidelity Investments (AART) as of 6302018
Measures of US Inflation
Year-Over-Year
050
075
100
125
150
175
200
225
250
275
1 2 3 4 5 6 7 8 9 10 20 30Years
Expected CPI Year-Over-Year
US Inflation Expectations
June 2010
June 2020
GFC
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Federal Reserve Board NBER Bureau of Economic Analysis Haver Analytics Fidelity Investments (AART) as of 33120 RIGHT The 50 of households with the lowest incomes Source Federal Reserve Board Bureau of Economic Analysis World Inequality Data Haver Analytics Fidelity Investments (AART) as of 12311819
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
0
0
0
0
0
0
0
0
0
0
0
70
75
80
85
90
95
100
105
1993 1996 1999 2002 2005 2008 2011 2014 2017 2020
Non-Financial Corporate CreditRevenues
12
13
14
15
16
17
18
19
20
21
300
350
400
450
500
550
600
1976 1981 1986 1991 1996 2001 2006 2011 2016
Financial Assets Bottom 50 Household Income
Household Financial Assets and Income
Share of Household Income
US Corporate Debt
Ratio Share of Disposable Income
ECO
NO
MY
-$1000
$0
$1000
$2000
$3000
$4000
$5000
May
-201
1
Nov
-201
1
May
-201
2
Nov
-201
2
May
-201
3
Nov
-201
3
May
-201
4
Nov
-201
4
May
-201
5
Nov
-201
5
May
-201
6
Nov
-201
6
May
-201
7
Nov
-201
7
May
-201
8
Nov
-201
8
May
-201
9
Nov
-201
9
May
-202
0
UK Japan Eurozone US Total
20
Billions (12-Month Change)
QE Quantitative Easing Source Federal Reserve Bank of Japan European Central Bank Bank of England Haver Analytics Fidelity Investments (AART) as of 53120
Central Bank Balance Sheets
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
ECO
NO
MY
-20
-15
-10
-5
0
5
10
-100
-075
-050
-025
000
025
050
075
100
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
State and Local Government Federal Government Federal Budget Deficit
Source CBO BEA Haver Analytics 2020 and 2021 Budget Deficits are CBO projections (httpswwwcbogovsystemfiles2020-0456344-CBO-presentationpdf ) Fidelity Investments (AART) 21
Percent of GDP
US Federal Fiscal Deficit and Government Impact on GDP
Contribution to GDP
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
ECO
NO
MY
22 Ag Agriculture FDI Foreign direct investment ADR American depositary receipt Source Fidelity Investments (AART) as of 63020
US-China Relationship
Geopolitical Rivalry
Trade
Industrial Policy Issuesbull IT sectorbull Health carebull Supply chains
Strategic Competition
Policy Tools of De-Globalization
Military Hegemony
in Asia
Economic Advantage in
Key Areas
Consumer and Other
Goods
Bilateral Flashpointsbull Hong Kongbull Detention campsbull Taiwanbull South China Sea
Policy Action Categories Example
TariffTrade Barriers Raise tariffs to reduce imports
Export and FDI Restrictions Curtail high-tech exports
Industrial Policies Mandate supply chainonshoring
ImmigrationHuman Mobility Tighter borders
Financial Restrictions Penalties
US sanctions tax policies
InfoData Restrictions Chinas firewall
Portfolio Investment Restrictions
US de-lists Chinese ADRs
Politicized Debt Action Selective US default
BroadEconomic
Investment
TariffsMarket Accessbull Phase 1 ag deal
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
ECO
NO
MY
Risks
23
Business Cycle
Asset Allocation Implications
US is in process of emerging from a brief but sharp recession
Policymakers providing abundant support to markets and economy
Emphasize focus on diversified anddisciplined investment strategies
Members hold a wide range of views but see opportunities within asset classes
Opportunities include non-US assets US small cap and value equities TIPS and gold
For illustrative purposes only Diversification does not ensure a profit or guarantee against a loss Source Fidelity Investments (AART) as of 63020
The recovery remains highly uncertain given the size and exogenous nature of
the COVID shock
Policy actions are playing a larger role in driving financial market performance than
in past cycles
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
ASSE
TM
ARKE
TS
EM Emerging Markets EMEA Europe the Middle East and Africa For indexes and other important information used to represent above asset categories see Appendix Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged Sector returns represented by SampP 500 sectors Sector investing involves risk Because of its narrow focus sector investing may be more volatile than investing in more diversified baskets of securities Source Bloomberg Finance LP Fidelity Investments (AART) as of 6302025
US Equity Styles Total ReturnInternational Equities and Global Assets Total Return
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
For illustrative purposes only Past performance is no guarantee of future results Diversification does not ensure a profit or guarantee against a loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Fidelity proprietary analysis based on Monte Carlo simulations using historical index returns Domestic Equity Dow Jones US Total Stock Market Index Foreign Equity MSCI ACWI ex USA Index Investment Grade (IG) Bonds Bloomberg Barclays US Aggregate Bond Index High Yield (HY) Bonds ICE BofA US High Yield Index Source Fidelity Investments Morningstar Bloomberg Barclays data as of 63020
-10
-5
0
5
10
15
20
25
Early Mid Late Recession
US Stocks IG Bonds Cash
Annualized Real ReturnAnnualized Nominal Return
75th
percentile
25th
percentile
Median
Asset Class Performance by Cycle Phase (1950ndash2018)
10-Year Portfolio Return Distribution by Cycle Phase Starting Point
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
ASSE
TM
ARKE
TS
-40
-30
-20
-10
0
10
20
30
40
Jun-
12
Sep-
12
Dec
-12
Mar
-13
Jun-
13
Sep-
13
Dec
-13
Mar
-14
Jun-
14
Sep-
14
Dec
-14
Mar
-15
Jun-
15
Sep-
15
Dec
-15
Mar
-16
Jun-
16
Sep-
16
Dec
-16
Mar
-17
Jun-
17
Sep-
17
Dec
-17
Mar
-18
Jun-
18
Sep-
18
Dec
-18
Mar
-19
Jun-
19
Sep-
19
Dec
-19
Mar
-20
Jun-
20
EM DM US
27Past performance is no guarantee of future results DM Developed Markets EM Emerging Markets EPS Earnings per share Forward EPS Next 12 months expectations Source MSCI Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Global EPS Growth (Trailing 12 Months)
Forward EPS
53
01-49
Percent
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
ASSE
TM
ARKE
TS
0
5
10
15
20
25
2005 2008 2011 2014 2017 2020
DM Trailing PE EM Trailing PE US Trailing PE Forward PE
28
DM Non-US Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Price-to-earnings ratio (PE) stock price divided by earnings per share Also known as the multiple PE gives investors an idea of how much they are paying for a companyrsquos earnings power Long-term average PE for Emerging Markets includes data for 1988ndash2017 for Non-US Developed Markets 1973ndash2016 for the United States 1926ndash2017 Indexes DMmdashMSCI EAFE Index EMmdashMSCI EM Index United StatesmdashSampP 500 Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
EM
US
DM
DM Long-Term Average
US Long-Term Average
EM Long-Term Average
Global Stock Market PE Ratios
Ratio
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
ASSE
TM
ARKE
TS
0
10
20
30
40
50
60
70
80
90
100
Rus
sia
Turk
eySp
ain
Sout
h Ko
rea
UK
Indo
nesi
aC
hina
Aust
ralia EM
Braz
ilIta
lyM
exic
oG
erm
any
Philip
pine
sD
MFr
ance
Can
ada
Japa
nIn
dia
US
-35
-30
-25
-20
-15
-10
-5
0
5
10
GBP JPY CAD EUR CNY
29
DM Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information LEFT Price-to-earnings (PE) ratio (or multiple) stock price divided by earnings per share which indicates how much investors are paying for a companyrsquos earnings power Cyclically adjusted earnings are 10-year averages adjusted for inflation Source FactSet countriesrsquo statistical organizations Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GBPmdashBritish pound JPYmdashJapanese yen CADmdashCanadian dollar EURmdasheuro CNYmdashChinese yuanSource Federal Reserve Board Haver Analytics Fidelity Investments (AART) as of 63020
53120 20-Year Range
Valuation of Real Exchange Rates
Expensive vs $
Cheap vs $
Shiller CAPE
Last 12-Month Range 63020
Cyclically Adjusted PEs Valuation of Major Currencies vs USD
Non-US Equity and Forex Valuations Relatively AttractiveCyclically adjusted PE (CAPE) ratios for international developed-market and emerging-market equities remained below US valuations providing a relatively favorable long-term backdrop for non-US stocks In Q2 the US dollar depreciated against many of the worldrsquos major currencies nevertheless US dollar valuations remain relatively expensive overall
ASSE
TM
ARKE
TS
LEFT TIPS Treasury Inflation-Protected Securities SOURCE Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Source CME Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 6302030
00
05
10
15
20
25
30
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
10 Year LT Average (Since 1998)
US Treasury Breakeven Inflation Rates
Yield
$0
$20
$40
$60
$80
$100
$120
$140
$160
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
WTI Crude Oil
Inflation Adjusted Price (March 2020 Dollars)
Real Oil Price
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
ASSE
TM
ARKE
TS
31
Past performance is no guarantee of future results Sectors as defined by GICS White line is a theoretical representation of the business cycle as it moves through early mid late and recession phases Green and red shaded portions above respectively represent over- or underperformance relative to the broader market unshaded (white) portions suggest no clear pattern of over- or underperformance Double +ndash signs indicate that the sector is showing a consistent signal across all three metrics full-phase average performance median monthly difference and cycle hit rate A single +ndash indicates a mixed or less consistent signal Return data from 1962 to 2016 Source Fidelity Investments (AART) as of 63020
Business-Cycle Approach to SectorsSector EARLY CYCLE
Economically sensitive sectors may tend to outperform while more defensive sectors have
tended to underperform
Making marginal portfolio allocation changes to manage
drawdown risk with sectorsmay enhance risk-adjusted
returns during this cycle
Defensive and inflation-resistantsectors tend to perform better
while more cyclical sectors underperform
Since performance is generally negative in
recessions investors should focus on the most defensive
historically stable sectors
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
ASSE
TM
ARKE
TS
400
420
440
460
480
500
520
540
092
094
096
098
100
102
104
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18D
ec-1
8M
ar-1
9Ju
n-19
Sep-
19D
ec-1
9M
ar-2
0Ju
n-20
Value vs Growth Performance CRB Raw Industrials Index
LEFT Gray bars represent US recessions as defined by NBER Asset classes represented by Value Fidelity Value ETF Growth Russell 1000reg
Growth Index Commodity Prices CRB Raw Industrials Index Source Federal Reserve Board NBER Haver Analytics Bloomberg Finance LP Fidelity Investments (AART) as of 63020 RIGHT Asset classes represented by Growth Russell 1000reg Growth Index Value Russell 1000reg Value Index Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020 Past performance is no guarantee of future results All indexes are unmanaged You cannot invest directly in an index Unlike mutual funds ETF shares are bought and sold at market price which may be higher or lower than their NAV and are not individually redeemed from the fund32
Value Equity More Attractive after Long UnderperformanceOn a cyclical basis the relative performance of value stocks has tended to correlate generally with the direction of the global economy and in particular with commodity prices which may be bottoming after the worldwide COVID-19 shutdown Meanwhile after a decade of trailing other leading factors and styles valuersquos relative valuations are at their most attractive in roughly 20 years
Price-to-Book Valuation SpreadsValue Relative Performance vs Commodity Prices
Ratio PB RatioIndex
0
1
2
3
4
5
6
7
8
9
10
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Growth vs Value
ASSE
TM
ARKE
TS
33
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Percentile ranks of yields and spreads based on historical period from 1993 to 2020 MBS mortgage-backed securities Source Bloomberg Barclays Bank of America Merrill Lynch JP Morgan Fidelity Investments (AART) as of 63020
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
ECO
NO
MY
-50
-40
-30
-20
-10
0
10
20
120
20
127
20
23
20
210
20
217
20
224
20
32
20
39
20
316
20
323
20
330
20
46
20
413
20
420
20
427
20
54
20
511
20
518
20
525
20
61
20
68
20
615
20
622
20
629
20
Europe United States China
European energy demand is reflected by a five-day moving average of daily electric loads Chinese energy demand is reflected by a seven-day moving average of daily coal consumption and US energy demand is reflected by weekly electric output The distance from average for the US and Europe is calculated as the current yearrsquos data as a percentage above or below the 2017ndash2019 weekly average The distance from average for the China is calculated as the current yearrsquos data as a percentage above or below the 2017ndash2019 daily average indexed to the Chinese New Year GDP-weighted countries in Europe include Italy Germany United Kingdom Spain Austria and France Source CCTD European Network of Transmission System Operators for Electricity Edison Electric Institute Haver Analytics Fidelity Investments (AART) as of 62820 12
Distance from Average
High-Frequency Energy Demand
-12-9-2
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
ECO
NO
MY
25
30
35
40
45
50
55
60
65
70
75
0
10
20
30
40
50
60
70
80
90
100
Dec
-05
Sep-
06Ju
n-07
Mar
-08
Dec
-08
Oct
-09
Jul-1
0Ap
r-11
Jan-
12O
ct-1
2Au
g-13
May
-14
Feb-
15N
ov-1
5Au
g-16
Jun-
17M
ar-1
8D
ec-1
8Se
p-19
Jun-
20
AART Industrial Production Diffusion IndexPMI New Export Orders
PMI Purchasing Managers Index A reading above 50 indicates the manufacturing economy is generally expanding below 50 indicates it is generally contracting AART Industrial Production Diffusion Index is a proprietary index based on industrial production data Gray bars represent China growth recessions as defined by AART LEFT Source China National Bureau of Statistics Haver Analytics Fidelity Investments (AART) AART Diffusion Index as of 53120 PMI as of 6302020 RIGHT Index values above 100 denote optimism values below 100 denote pessimism and an index value of 100 denotes neutral sentiment Source China National Bureau of Statistics Haver Analytics Fidelity Investments (AART) as of 53120 13
China Industrial Activity China Consumer Confidence Index
90
95
100
105
110
115
120
125
130
Jun-
10
Jun-
11
Jun-
12
Jun-
13
Jun-
14
Jun-
15
Jun-
16
Jun-
17
Jun-
18
Jun-
19
Jun-
20
Consumer Confidence Index
Percent of Industries in Expansion Index Value 100 = Neutral SentimentPMI
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
ECO
NO
MY
LEFT Source Census Haver Analytics Fidelity Investments (AART) as of 62720 RIGHT Workers receiving unemployment insurance ldquoWith $250rdquo is if extra benefit is reduced to that level after expiration of $600 Worker income cohorts are defined by percentiles low Income (25th percentile) middle income (50th percentile) and high income (75th percentile) Working paper ldquoUS Unemployment Insurance Replacement Rates During the Pandemicrdquo by Ganong Noel and Vavra Fidelity Investments (AART) as of 53120 14
-60
-40
-20
0
20
40
60
80
100
LowIncome
MiddleIncome
HighIncome
With $600 CARES Benefit With $250
Percent Above or Below Normal Income
Weekly Earnings of Unemployed Individuals
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
0
001
002
003
004
005
006
007
008
009
01
0
1
2
3
4
5
6
7
Jun-
07
Jun-
08
Jun-
09
Jun-
10
Jun-
11
Jun-
12
Jun-
13
Jun-
14
Jun-
15
Jun-
16
Jun-
17
Jun-
18
Jun-
19
Jun-
20
Initial Claims
Millions
US Unemployment Claims
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Conference Board Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Other industries most impacted shaded in blue include For GDP Recreation Services Autos Transportation Services Recreation Goods Clothing Gasoline Furnishings For Employment Retail Transportation Source Conference Board NBER Haver Analytics Fidelity Investments (AART) as of 2292015
Restaurants and Hotels
Leisure and Hospitality
0
5
10
15
20
25
GDP Private Employment
Largest Affected Industry Other
Sectors Most Impacted by COVID-19
Share
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Consumer Sentiment
00
1
2
3
4
5
6
7
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
2020
Consumer ExpectationsPresent Situation
Ratio
ECO
NO
MY
ldquoFastrdquo reopening states include Arizona Florida Georgia and Texas ldquoSlowrdquo reopening states include Massachusetts New York and New Jersey LEFT Source Johns Hopkins University Haver Analytics Fidelity Investments (AART) as of 7320 RIGHT Baseline is defined as the median for that day of the week during the period 1420ndash13120 Source OpenTable Homebase Haver Analytics Fidelity Investments (AART) as of 62620
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
Hours Worked byEmployees
Local BusinessesOpen
OpenTableReservations YoY
April Trough 62620 61820
Cases (Five Day Moving Average)
New COVID-19 Cases Daily Data in ldquoFastrdquo Reopening States
Hours and Businesses (0 = Baseline) Year-Over-Year
16
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
0
1000
2000
3000
4000
5000
6000
7000
8000
33
203
102
03
172
03
242
03
312
04
720
414
20
421
20
428
20
55
205
122
05
192
05
262
06
220
69
206
162
06
232
06
302
0
Fast Reopening States Slow Reopening States
ECO
NO
MY
-30
-20
-10
0
10
20
30
Jun-19 Sep-19 Dec-19 Mar-20 Jun-20
2020 2021
40
50
60
70
80
90
100
110
120
-12 -9 -6 -3 0 3 6 9 12 15 18 21 24 27 30 33 36
Months (t=0 is start of recession)
Average since 1980 2007ndash20082020ndash22 Consensus Estimate
LEFT AND RIGHT EPS Earnings per share Past performance is no guarantee of future results Source Bloomberg Finance LP Fidelity Investments (AART) Haver Analytics as of 6252017
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
ECO
NO
MY
050
075
100
125
150
175
200
225
250
275
ClevelandFed
AtlantaFed
New YorkFed
CoreCPI
May-2020 Dec-2019
LEFT CPI Consumer Price Index Core CPI excludes Food and Energy Cleveland Fed Cleveland 16 Trimmed Mean CPI Atlanta Fed StickyCPI New York Fed Underlying Inflation Gauge Source Federal Reserve Board Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GFC Global Financial Crisis Inflation curves derived from Inflation swaps Source Bloomberg Financial Fidelity Investments (AART) as of 6302018
Measures of US Inflation
Year-Over-Year
050
075
100
125
150
175
200
225
250
275
1 2 3 4 5 6 7 8 9 10 20 30Years
Expected CPI Year-Over-Year
US Inflation Expectations
June 2010
June 2020
GFC
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Federal Reserve Board NBER Bureau of Economic Analysis Haver Analytics Fidelity Investments (AART) as of 33120 RIGHT The 50 of households with the lowest incomes Source Federal Reserve Board Bureau of Economic Analysis World Inequality Data Haver Analytics Fidelity Investments (AART) as of 12311819
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
0
0
0
0
0
0
0
0
0
0
0
70
75
80
85
90
95
100
105
1993 1996 1999 2002 2005 2008 2011 2014 2017 2020
Non-Financial Corporate CreditRevenues
12
13
14
15
16
17
18
19
20
21
300
350
400
450
500
550
600
1976 1981 1986 1991 1996 2001 2006 2011 2016
Financial Assets Bottom 50 Household Income
Household Financial Assets and Income
Share of Household Income
US Corporate Debt
Ratio Share of Disposable Income
ECO
NO
MY
-$1000
$0
$1000
$2000
$3000
$4000
$5000
May
-201
1
Nov
-201
1
May
-201
2
Nov
-201
2
May
-201
3
Nov
-201
3
May
-201
4
Nov
-201
4
May
-201
5
Nov
-201
5
May
-201
6
Nov
-201
6
May
-201
7
Nov
-201
7
May
-201
8
Nov
-201
8
May
-201
9
Nov
-201
9
May
-202
0
UK Japan Eurozone US Total
20
Billions (12-Month Change)
QE Quantitative Easing Source Federal Reserve Bank of Japan European Central Bank Bank of England Haver Analytics Fidelity Investments (AART) as of 53120
Central Bank Balance Sheets
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
ECO
NO
MY
-20
-15
-10
-5
0
5
10
-100
-075
-050
-025
000
025
050
075
100
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
State and Local Government Federal Government Federal Budget Deficit
Source CBO BEA Haver Analytics 2020 and 2021 Budget Deficits are CBO projections (httpswwwcbogovsystemfiles2020-0456344-CBO-presentationpdf ) Fidelity Investments (AART) 21
Percent of GDP
US Federal Fiscal Deficit and Government Impact on GDP
Contribution to GDP
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
ECO
NO
MY
22 Ag Agriculture FDI Foreign direct investment ADR American depositary receipt Source Fidelity Investments (AART) as of 63020
US-China Relationship
Geopolitical Rivalry
Trade
Industrial Policy Issuesbull IT sectorbull Health carebull Supply chains
Strategic Competition
Policy Tools of De-Globalization
Military Hegemony
in Asia
Economic Advantage in
Key Areas
Consumer and Other
Goods
Bilateral Flashpointsbull Hong Kongbull Detention campsbull Taiwanbull South China Sea
Policy Action Categories Example
TariffTrade Barriers Raise tariffs to reduce imports
Export and FDI Restrictions Curtail high-tech exports
Industrial Policies Mandate supply chainonshoring
ImmigrationHuman Mobility Tighter borders
Financial Restrictions Penalties
US sanctions tax policies
InfoData Restrictions Chinas firewall
Portfolio Investment Restrictions
US de-lists Chinese ADRs
Politicized Debt Action Selective US default
BroadEconomic
Investment
TariffsMarket Accessbull Phase 1 ag deal
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
ECO
NO
MY
Risks
23
Business Cycle
Asset Allocation Implications
US is in process of emerging from a brief but sharp recession
Policymakers providing abundant support to markets and economy
Emphasize focus on diversified anddisciplined investment strategies
Members hold a wide range of views but see opportunities within asset classes
Opportunities include non-US assets US small cap and value equities TIPS and gold
For illustrative purposes only Diversification does not ensure a profit or guarantee against a loss Source Fidelity Investments (AART) as of 63020
The recovery remains highly uncertain given the size and exogenous nature of
the COVID shock
Policy actions are playing a larger role in driving financial market performance than
in past cycles
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
ASSE
TM
ARKE
TS
EM Emerging Markets EMEA Europe the Middle East and Africa For indexes and other important information used to represent above asset categories see Appendix Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged Sector returns represented by SampP 500 sectors Sector investing involves risk Because of its narrow focus sector investing may be more volatile than investing in more diversified baskets of securities Source Bloomberg Finance LP Fidelity Investments (AART) as of 6302025
US Equity Styles Total ReturnInternational Equities and Global Assets Total Return
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
For illustrative purposes only Past performance is no guarantee of future results Diversification does not ensure a profit or guarantee against a loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Fidelity proprietary analysis based on Monte Carlo simulations using historical index returns Domestic Equity Dow Jones US Total Stock Market Index Foreign Equity MSCI ACWI ex USA Index Investment Grade (IG) Bonds Bloomberg Barclays US Aggregate Bond Index High Yield (HY) Bonds ICE BofA US High Yield Index Source Fidelity Investments Morningstar Bloomberg Barclays data as of 63020
-10
-5
0
5
10
15
20
25
Early Mid Late Recession
US Stocks IG Bonds Cash
Annualized Real ReturnAnnualized Nominal Return
75th
percentile
25th
percentile
Median
Asset Class Performance by Cycle Phase (1950ndash2018)
10-Year Portfolio Return Distribution by Cycle Phase Starting Point
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
ASSE
TM
ARKE
TS
-40
-30
-20
-10
0
10
20
30
40
Jun-
12
Sep-
12
Dec
-12
Mar
-13
Jun-
13
Sep-
13
Dec
-13
Mar
-14
Jun-
14
Sep-
14
Dec
-14
Mar
-15
Jun-
15
Sep-
15
Dec
-15
Mar
-16
Jun-
16
Sep-
16
Dec
-16
Mar
-17
Jun-
17
Sep-
17
Dec
-17
Mar
-18
Jun-
18
Sep-
18
Dec
-18
Mar
-19
Jun-
19
Sep-
19
Dec
-19
Mar
-20
Jun-
20
EM DM US
27Past performance is no guarantee of future results DM Developed Markets EM Emerging Markets EPS Earnings per share Forward EPS Next 12 months expectations Source MSCI Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Global EPS Growth (Trailing 12 Months)
Forward EPS
53
01-49
Percent
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
ASSE
TM
ARKE
TS
0
5
10
15
20
25
2005 2008 2011 2014 2017 2020
DM Trailing PE EM Trailing PE US Trailing PE Forward PE
28
DM Non-US Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Price-to-earnings ratio (PE) stock price divided by earnings per share Also known as the multiple PE gives investors an idea of how much they are paying for a companyrsquos earnings power Long-term average PE for Emerging Markets includes data for 1988ndash2017 for Non-US Developed Markets 1973ndash2016 for the United States 1926ndash2017 Indexes DMmdashMSCI EAFE Index EMmdashMSCI EM Index United StatesmdashSampP 500 Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
EM
US
DM
DM Long-Term Average
US Long-Term Average
EM Long-Term Average
Global Stock Market PE Ratios
Ratio
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
ASSE
TM
ARKE
TS
0
10
20
30
40
50
60
70
80
90
100
Rus
sia
Turk
eySp
ain
Sout
h Ko
rea
UK
Indo
nesi
aC
hina
Aust
ralia EM
Braz
ilIta
lyM
exic
oG
erm
any
Philip
pine
sD
MFr
ance
Can
ada
Japa
nIn
dia
US
-35
-30
-25
-20
-15
-10
-5
0
5
10
GBP JPY CAD EUR CNY
29
DM Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information LEFT Price-to-earnings (PE) ratio (or multiple) stock price divided by earnings per share which indicates how much investors are paying for a companyrsquos earnings power Cyclically adjusted earnings are 10-year averages adjusted for inflation Source FactSet countriesrsquo statistical organizations Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GBPmdashBritish pound JPYmdashJapanese yen CADmdashCanadian dollar EURmdasheuro CNYmdashChinese yuanSource Federal Reserve Board Haver Analytics Fidelity Investments (AART) as of 63020
53120 20-Year Range
Valuation of Real Exchange Rates
Expensive vs $
Cheap vs $
Shiller CAPE
Last 12-Month Range 63020
Cyclically Adjusted PEs Valuation of Major Currencies vs USD
Non-US Equity and Forex Valuations Relatively AttractiveCyclically adjusted PE (CAPE) ratios for international developed-market and emerging-market equities remained below US valuations providing a relatively favorable long-term backdrop for non-US stocks In Q2 the US dollar depreciated against many of the worldrsquos major currencies nevertheless US dollar valuations remain relatively expensive overall
ASSE
TM
ARKE
TS
LEFT TIPS Treasury Inflation-Protected Securities SOURCE Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Source CME Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 6302030
00
05
10
15
20
25
30
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
10 Year LT Average (Since 1998)
US Treasury Breakeven Inflation Rates
Yield
$0
$20
$40
$60
$80
$100
$120
$140
$160
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
WTI Crude Oil
Inflation Adjusted Price (March 2020 Dollars)
Real Oil Price
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
ASSE
TM
ARKE
TS
31
Past performance is no guarantee of future results Sectors as defined by GICS White line is a theoretical representation of the business cycle as it moves through early mid late and recession phases Green and red shaded portions above respectively represent over- or underperformance relative to the broader market unshaded (white) portions suggest no clear pattern of over- or underperformance Double +ndash signs indicate that the sector is showing a consistent signal across all three metrics full-phase average performance median monthly difference and cycle hit rate A single +ndash indicates a mixed or less consistent signal Return data from 1962 to 2016 Source Fidelity Investments (AART) as of 63020
Business-Cycle Approach to SectorsSector EARLY CYCLE
Economically sensitive sectors may tend to outperform while more defensive sectors have
tended to underperform
Making marginal portfolio allocation changes to manage
drawdown risk with sectorsmay enhance risk-adjusted
returns during this cycle
Defensive and inflation-resistantsectors tend to perform better
while more cyclical sectors underperform
Since performance is generally negative in
recessions investors should focus on the most defensive
historically stable sectors
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
ASSE
TM
ARKE
TS
400
420
440
460
480
500
520
540
092
094
096
098
100
102
104
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18D
ec-1
8M
ar-1
9Ju
n-19
Sep-
19D
ec-1
9M
ar-2
0Ju
n-20
Value vs Growth Performance CRB Raw Industrials Index
LEFT Gray bars represent US recessions as defined by NBER Asset classes represented by Value Fidelity Value ETF Growth Russell 1000reg
Growth Index Commodity Prices CRB Raw Industrials Index Source Federal Reserve Board NBER Haver Analytics Bloomberg Finance LP Fidelity Investments (AART) as of 63020 RIGHT Asset classes represented by Growth Russell 1000reg Growth Index Value Russell 1000reg Value Index Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020 Past performance is no guarantee of future results All indexes are unmanaged You cannot invest directly in an index Unlike mutual funds ETF shares are bought and sold at market price which may be higher or lower than their NAV and are not individually redeemed from the fund32
Value Equity More Attractive after Long UnderperformanceOn a cyclical basis the relative performance of value stocks has tended to correlate generally with the direction of the global economy and in particular with commodity prices which may be bottoming after the worldwide COVID-19 shutdown Meanwhile after a decade of trailing other leading factors and styles valuersquos relative valuations are at their most attractive in roughly 20 years
Price-to-Book Valuation SpreadsValue Relative Performance vs Commodity Prices
Ratio PB RatioIndex
0
1
2
3
4
5
6
7
8
9
10
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Growth vs Value
ASSE
TM
ARKE
TS
33
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Percentile ranks of yields and spreads based on historical period from 1993 to 2020 MBS mortgage-backed securities Source Bloomberg Barclays Bank of America Merrill Lynch JP Morgan Fidelity Investments (AART) as of 63020
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
ECO
NO
MY
25
30
35
40
45
50
55
60
65
70
75
0
10
20
30
40
50
60
70
80
90
100
Dec
-05
Sep-
06Ju
n-07
Mar
-08
Dec
-08
Oct
-09
Jul-1
0Ap
r-11
Jan-
12O
ct-1
2Au
g-13
May
-14
Feb-
15N
ov-1
5Au
g-16
Jun-
17M
ar-1
8D
ec-1
8Se
p-19
Jun-
20
AART Industrial Production Diffusion IndexPMI New Export Orders
PMI Purchasing Managers Index A reading above 50 indicates the manufacturing economy is generally expanding below 50 indicates it is generally contracting AART Industrial Production Diffusion Index is a proprietary index based on industrial production data Gray bars represent China growth recessions as defined by AART LEFT Source China National Bureau of Statistics Haver Analytics Fidelity Investments (AART) AART Diffusion Index as of 53120 PMI as of 6302020 RIGHT Index values above 100 denote optimism values below 100 denote pessimism and an index value of 100 denotes neutral sentiment Source China National Bureau of Statistics Haver Analytics Fidelity Investments (AART) as of 53120 13
China Industrial Activity China Consumer Confidence Index
90
95
100
105
110
115
120
125
130
Jun-
10
Jun-
11
Jun-
12
Jun-
13
Jun-
14
Jun-
15
Jun-
16
Jun-
17
Jun-
18
Jun-
19
Jun-
20
Consumer Confidence Index
Percent of Industries in Expansion Index Value 100 = Neutral SentimentPMI
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
ECO
NO
MY
LEFT Source Census Haver Analytics Fidelity Investments (AART) as of 62720 RIGHT Workers receiving unemployment insurance ldquoWith $250rdquo is if extra benefit is reduced to that level after expiration of $600 Worker income cohorts are defined by percentiles low Income (25th percentile) middle income (50th percentile) and high income (75th percentile) Working paper ldquoUS Unemployment Insurance Replacement Rates During the Pandemicrdquo by Ganong Noel and Vavra Fidelity Investments (AART) as of 53120 14
-60
-40
-20
0
20
40
60
80
100
LowIncome
MiddleIncome
HighIncome
With $600 CARES Benefit With $250
Percent Above or Below Normal Income
Weekly Earnings of Unemployed Individuals
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
0
001
002
003
004
005
006
007
008
009
01
0
1
2
3
4
5
6
7
Jun-
07
Jun-
08
Jun-
09
Jun-
10
Jun-
11
Jun-
12
Jun-
13
Jun-
14
Jun-
15
Jun-
16
Jun-
17
Jun-
18
Jun-
19
Jun-
20
Initial Claims
Millions
US Unemployment Claims
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Conference Board Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Other industries most impacted shaded in blue include For GDP Recreation Services Autos Transportation Services Recreation Goods Clothing Gasoline Furnishings For Employment Retail Transportation Source Conference Board NBER Haver Analytics Fidelity Investments (AART) as of 2292015
Restaurants and Hotels
Leisure and Hospitality
0
5
10
15
20
25
GDP Private Employment
Largest Affected Industry Other
Sectors Most Impacted by COVID-19
Share
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Consumer Sentiment
00
1
2
3
4
5
6
7
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
2020
Consumer ExpectationsPresent Situation
Ratio
ECO
NO
MY
ldquoFastrdquo reopening states include Arizona Florida Georgia and Texas ldquoSlowrdquo reopening states include Massachusetts New York and New Jersey LEFT Source Johns Hopkins University Haver Analytics Fidelity Investments (AART) as of 7320 RIGHT Baseline is defined as the median for that day of the week during the period 1420ndash13120 Source OpenTable Homebase Haver Analytics Fidelity Investments (AART) as of 62620
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
Hours Worked byEmployees
Local BusinessesOpen
OpenTableReservations YoY
April Trough 62620 61820
Cases (Five Day Moving Average)
New COVID-19 Cases Daily Data in ldquoFastrdquo Reopening States
Hours and Businesses (0 = Baseline) Year-Over-Year
16
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
0
1000
2000
3000
4000
5000
6000
7000
8000
33
203
102
03
172
03
242
03
312
04
720
414
20
421
20
428
20
55
205
122
05
192
05
262
06
220
69
206
162
06
232
06
302
0
Fast Reopening States Slow Reopening States
ECO
NO
MY
-30
-20
-10
0
10
20
30
Jun-19 Sep-19 Dec-19 Mar-20 Jun-20
2020 2021
40
50
60
70
80
90
100
110
120
-12 -9 -6 -3 0 3 6 9 12 15 18 21 24 27 30 33 36
Months (t=0 is start of recession)
Average since 1980 2007ndash20082020ndash22 Consensus Estimate
LEFT AND RIGHT EPS Earnings per share Past performance is no guarantee of future results Source Bloomberg Finance LP Fidelity Investments (AART) Haver Analytics as of 6252017
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
ECO
NO
MY
050
075
100
125
150
175
200
225
250
275
ClevelandFed
AtlantaFed
New YorkFed
CoreCPI
May-2020 Dec-2019
LEFT CPI Consumer Price Index Core CPI excludes Food and Energy Cleveland Fed Cleveland 16 Trimmed Mean CPI Atlanta Fed StickyCPI New York Fed Underlying Inflation Gauge Source Federal Reserve Board Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GFC Global Financial Crisis Inflation curves derived from Inflation swaps Source Bloomberg Financial Fidelity Investments (AART) as of 6302018
Measures of US Inflation
Year-Over-Year
050
075
100
125
150
175
200
225
250
275
1 2 3 4 5 6 7 8 9 10 20 30Years
Expected CPI Year-Over-Year
US Inflation Expectations
June 2010
June 2020
GFC
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Federal Reserve Board NBER Bureau of Economic Analysis Haver Analytics Fidelity Investments (AART) as of 33120 RIGHT The 50 of households with the lowest incomes Source Federal Reserve Board Bureau of Economic Analysis World Inequality Data Haver Analytics Fidelity Investments (AART) as of 12311819
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
0
0
0
0
0
0
0
0
0
0
0
70
75
80
85
90
95
100
105
1993 1996 1999 2002 2005 2008 2011 2014 2017 2020
Non-Financial Corporate CreditRevenues
12
13
14
15
16
17
18
19
20
21
300
350
400
450
500
550
600
1976 1981 1986 1991 1996 2001 2006 2011 2016
Financial Assets Bottom 50 Household Income
Household Financial Assets and Income
Share of Household Income
US Corporate Debt
Ratio Share of Disposable Income
ECO
NO
MY
-$1000
$0
$1000
$2000
$3000
$4000
$5000
May
-201
1
Nov
-201
1
May
-201
2
Nov
-201
2
May
-201
3
Nov
-201
3
May
-201
4
Nov
-201
4
May
-201
5
Nov
-201
5
May
-201
6
Nov
-201
6
May
-201
7
Nov
-201
7
May
-201
8
Nov
-201
8
May
-201
9
Nov
-201
9
May
-202
0
UK Japan Eurozone US Total
20
Billions (12-Month Change)
QE Quantitative Easing Source Federal Reserve Bank of Japan European Central Bank Bank of England Haver Analytics Fidelity Investments (AART) as of 53120
Central Bank Balance Sheets
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
ECO
NO
MY
-20
-15
-10
-5
0
5
10
-100
-075
-050
-025
000
025
050
075
100
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
State and Local Government Federal Government Federal Budget Deficit
Source CBO BEA Haver Analytics 2020 and 2021 Budget Deficits are CBO projections (httpswwwcbogovsystemfiles2020-0456344-CBO-presentationpdf ) Fidelity Investments (AART) 21
Percent of GDP
US Federal Fiscal Deficit and Government Impact on GDP
Contribution to GDP
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
ECO
NO
MY
22 Ag Agriculture FDI Foreign direct investment ADR American depositary receipt Source Fidelity Investments (AART) as of 63020
US-China Relationship
Geopolitical Rivalry
Trade
Industrial Policy Issuesbull IT sectorbull Health carebull Supply chains
Strategic Competition
Policy Tools of De-Globalization
Military Hegemony
in Asia
Economic Advantage in
Key Areas
Consumer and Other
Goods
Bilateral Flashpointsbull Hong Kongbull Detention campsbull Taiwanbull South China Sea
Policy Action Categories Example
TariffTrade Barriers Raise tariffs to reduce imports
Export and FDI Restrictions Curtail high-tech exports
Industrial Policies Mandate supply chainonshoring
ImmigrationHuman Mobility Tighter borders
Financial Restrictions Penalties
US sanctions tax policies
InfoData Restrictions Chinas firewall
Portfolio Investment Restrictions
US de-lists Chinese ADRs
Politicized Debt Action Selective US default
BroadEconomic
Investment
TariffsMarket Accessbull Phase 1 ag deal
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
ECO
NO
MY
Risks
23
Business Cycle
Asset Allocation Implications
US is in process of emerging from a brief but sharp recession
Policymakers providing abundant support to markets and economy
Emphasize focus on diversified anddisciplined investment strategies
Members hold a wide range of views but see opportunities within asset classes
Opportunities include non-US assets US small cap and value equities TIPS and gold
For illustrative purposes only Diversification does not ensure a profit or guarantee against a loss Source Fidelity Investments (AART) as of 63020
The recovery remains highly uncertain given the size and exogenous nature of
the COVID shock
Policy actions are playing a larger role in driving financial market performance than
in past cycles
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
ASSE
TM
ARKE
TS
EM Emerging Markets EMEA Europe the Middle East and Africa For indexes and other important information used to represent above asset categories see Appendix Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged Sector returns represented by SampP 500 sectors Sector investing involves risk Because of its narrow focus sector investing may be more volatile than investing in more diversified baskets of securities Source Bloomberg Finance LP Fidelity Investments (AART) as of 6302025
US Equity Styles Total ReturnInternational Equities and Global Assets Total Return
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
For illustrative purposes only Past performance is no guarantee of future results Diversification does not ensure a profit or guarantee against a loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Fidelity proprietary analysis based on Monte Carlo simulations using historical index returns Domestic Equity Dow Jones US Total Stock Market Index Foreign Equity MSCI ACWI ex USA Index Investment Grade (IG) Bonds Bloomberg Barclays US Aggregate Bond Index High Yield (HY) Bonds ICE BofA US High Yield Index Source Fidelity Investments Morningstar Bloomberg Barclays data as of 63020
-10
-5
0
5
10
15
20
25
Early Mid Late Recession
US Stocks IG Bonds Cash
Annualized Real ReturnAnnualized Nominal Return
75th
percentile
25th
percentile
Median
Asset Class Performance by Cycle Phase (1950ndash2018)
10-Year Portfolio Return Distribution by Cycle Phase Starting Point
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
ASSE
TM
ARKE
TS
-40
-30
-20
-10
0
10
20
30
40
Jun-
12
Sep-
12
Dec
-12
Mar
-13
Jun-
13
Sep-
13
Dec
-13
Mar
-14
Jun-
14
Sep-
14
Dec
-14
Mar
-15
Jun-
15
Sep-
15
Dec
-15
Mar
-16
Jun-
16
Sep-
16
Dec
-16
Mar
-17
Jun-
17
Sep-
17
Dec
-17
Mar
-18
Jun-
18
Sep-
18
Dec
-18
Mar
-19
Jun-
19
Sep-
19
Dec
-19
Mar
-20
Jun-
20
EM DM US
27Past performance is no guarantee of future results DM Developed Markets EM Emerging Markets EPS Earnings per share Forward EPS Next 12 months expectations Source MSCI Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Global EPS Growth (Trailing 12 Months)
Forward EPS
53
01-49
Percent
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
ASSE
TM
ARKE
TS
0
5
10
15
20
25
2005 2008 2011 2014 2017 2020
DM Trailing PE EM Trailing PE US Trailing PE Forward PE
28
DM Non-US Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Price-to-earnings ratio (PE) stock price divided by earnings per share Also known as the multiple PE gives investors an idea of how much they are paying for a companyrsquos earnings power Long-term average PE for Emerging Markets includes data for 1988ndash2017 for Non-US Developed Markets 1973ndash2016 for the United States 1926ndash2017 Indexes DMmdashMSCI EAFE Index EMmdashMSCI EM Index United StatesmdashSampP 500 Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
EM
US
DM
DM Long-Term Average
US Long-Term Average
EM Long-Term Average
Global Stock Market PE Ratios
Ratio
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
ASSE
TM
ARKE
TS
0
10
20
30
40
50
60
70
80
90
100
Rus
sia
Turk
eySp
ain
Sout
h Ko
rea
UK
Indo
nesi
aC
hina
Aust
ralia EM
Braz
ilIta
lyM
exic
oG
erm
any
Philip
pine
sD
MFr
ance
Can
ada
Japa
nIn
dia
US
-35
-30
-25
-20
-15
-10
-5
0
5
10
GBP JPY CAD EUR CNY
29
DM Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information LEFT Price-to-earnings (PE) ratio (or multiple) stock price divided by earnings per share which indicates how much investors are paying for a companyrsquos earnings power Cyclically adjusted earnings are 10-year averages adjusted for inflation Source FactSet countriesrsquo statistical organizations Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GBPmdashBritish pound JPYmdashJapanese yen CADmdashCanadian dollar EURmdasheuro CNYmdashChinese yuanSource Federal Reserve Board Haver Analytics Fidelity Investments (AART) as of 63020
53120 20-Year Range
Valuation of Real Exchange Rates
Expensive vs $
Cheap vs $
Shiller CAPE
Last 12-Month Range 63020
Cyclically Adjusted PEs Valuation of Major Currencies vs USD
Non-US Equity and Forex Valuations Relatively AttractiveCyclically adjusted PE (CAPE) ratios for international developed-market and emerging-market equities remained below US valuations providing a relatively favorable long-term backdrop for non-US stocks In Q2 the US dollar depreciated against many of the worldrsquos major currencies nevertheless US dollar valuations remain relatively expensive overall
ASSE
TM
ARKE
TS
LEFT TIPS Treasury Inflation-Protected Securities SOURCE Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Source CME Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 6302030
00
05
10
15
20
25
30
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
10 Year LT Average (Since 1998)
US Treasury Breakeven Inflation Rates
Yield
$0
$20
$40
$60
$80
$100
$120
$140
$160
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
WTI Crude Oil
Inflation Adjusted Price (March 2020 Dollars)
Real Oil Price
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
ASSE
TM
ARKE
TS
31
Past performance is no guarantee of future results Sectors as defined by GICS White line is a theoretical representation of the business cycle as it moves through early mid late and recession phases Green and red shaded portions above respectively represent over- or underperformance relative to the broader market unshaded (white) portions suggest no clear pattern of over- or underperformance Double +ndash signs indicate that the sector is showing a consistent signal across all three metrics full-phase average performance median monthly difference and cycle hit rate A single +ndash indicates a mixed or less consistent signal Return data from 1962 to 2016 Source Fidelity Investments (AART) as of 63020
Business-Cycle Approach to SectorsSector EARLY CYCLE
Economically sensitive sectors may tend to outperform while more defensive sectors have
tended to underperform
Making marginal portfolio allocation changes to manage
drawdown risk with sectorsmay enhance risk-adjusted
returns during this cycle
Defensive and inflation-resistantsectors tend to perform better
while more cyclical sectors underperform
Since performance is generally negative in
recessions investors should focus on the most defensive
historically stable sectors
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
ASSE
TM
ARKE
TS
400
420
440
460
480
500
520
540
092
094
096
098
100
102
104
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18D
ec-1
8M
ar-1
9Ju
n-19
Sep-
19D
ec-1
9M
ar-2
0Ju
n-20
Value vs Growth Performance CRB Raw Industrials Index
LEFT Gray bars represent US recessions as defined by NBER Asset classes represented by Value Fidelity Value ETF Growth Russell 1000reg
Growth Index Commodity Prices CRB Raw Industrials Index Source Federal Reserve Board NBER Haver Analytics Bloomberg Finance LP Fidelity Investments (AART) as of 63020 RIGHT Asset classes represented by Growth Russell 1000reg Growth Index Value Russell 1000reg Value Index Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020 Past performance is no guarantee of future results All indexes are unmanaged You cannot invest directly in an index Unlike mutual funds ETF shares are bought and sold at market price which may be higher or lower than their NAV and are not individually redeemed from the fund32
Value Equity More Attractive after Long UnderperformanceOn a cyclical basis the relative performance of value stocks has tended to correlate generally with the direction of the global economy and in particular with commodity prices which may be bottoming after the worldwide COVID-19 shutdown Meanwhile after a decade of trailing other leading factors and styles valuersquos relative valuations are at their most attractive in roughly 20 years
Price-to-Book Valuation SpreadsValue Relative Performance vs Commodity Prices
Ratio PB RatioIndex
0
1
2
3
4
5
6
7
8
9
10
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Growth vs Value
ASSE
TM
ARKE
TS
33
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Percentile ranks of yields and spreads based on historical period from 1993 to 2020 MBS mortgage-backed securities Source Bloomberg Barclays Bank of America Merrill Lynch JP Morgan Fidelity Investments (AART) as of 63020
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
ECO
NO
MY
LEFT Source Census Haver Analytics Fidelity Investments (AART) as of 62720 RIGHT Workers receiving unemployment insurance ldquoWith $250rdquo is if extra benefit is reduced to that level after expiration of $600 Worker income cohorts are defined by percentiles low Income (25th percentile) middle income (50th percentile) and high income (75th percentile) Working paper ldquoUS Unemployment Insurance Replacement Rates During the Pandemicrdquo by Ganong Noel and Vavra Fidelity Investments (AART) as of 53120 14
-60
-40
-20
0
20
40
60
80
100
LowIncome
MiddleIncome
HighIncome
With $600 CARES Benefit With $250
Percent Above or Below Normal Income
Weekly Earnings of Unemployed Individuals
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
0
001
002
003
004
005
006
007
008
009
01
0
1
2
3
4
5
6
7
Jun-
07
Jun-
08
Jun-
09
Jun-
10
Jun-
11
Jun-
12
Jun-
13
Jun-
14
Jun-
15
Jun-
16
Jun-
17
Jun-
18
Jun-
19
Jun-
20
Initial Claims
Millions
US Unemployment Claims
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Conference Board Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Other industries most impacted shaded in blue include For GDP Recreation Services Autos Transportation Services Recreation Goods Clothing Gasoline Furnishings For Employment Retail Transportation Source Conference Board NBER Haver Analytics Fidelity Investments (AART) as of 2292015
Restaurants and Hotels
Leisure and Hospitality
0
5
10
15
20
25
GDP Private Employment
Largest Affected Industry Other
Sectors Most Impacted by COVID-19
Share
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Consumer Sentiment
00
1
2
3
4
5
6
7
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
2020
Consumer ExpectationsPresent Situation
Ratio
ECO
NO
MY
ldquoFastrdquo reopening states include Arizona Florida Georgia and Texas ldquoSlowrdquo reopening states include Massachusetts New York and New Jersey LEFT Source Johns Hopkins University Haver Analytics Fidelity Investments (AART) as of 7320 RIGHT Baseline is defined as the median for that day of the week during the period 1420ndash13120 Source OpenTable Homebase Haver Analytics Fidelity Investments (AART) as of 62620
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
Hours Worked byEmployees
Local BusinessesOpen
OpenTableReservations YoY
April Trough 62620 61820
Cases (Five Day Moving Average)
New COVID-19 Cases Daily Data in ldquoFastrdquo Reopening States
Hours and Businesses (0 = Baseline) Year-Over-Year
16
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
0
1000
2000
3000
4000
5000
6000
7000
8000
33
203
102
03
172
03
242
03
312
04
720
414
20
421
20
428
20
55
205
122
05
192
05
262
06
220
69
206
162
06
232
06
302
0
Fast Reopening States Slow Reopening States
ECO
NO
MY
-30
-20
-10
0
10
20
30
Jun-19 Sep-19 Dec-19 Mar-20 Jun-20
2020 2021
40
50
60
70
80
90
100
110
120
-12 -9 -6 -3 0 3 6 9 12 15 18 21 24 27 30 33 36
Months (t=0 is start of recession)
Average since 1980 2007ndash20082020ndash22 Consensus Estimate
LEFT AND RIGHT EPS Earnings per share Past performance is no guarantee of future results Source Bloomberg Finance LP Fidelity Investments (AART) Haver Analytics as of 6252017
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
ECO
NO
MY
050
075
100
125
150
175
200
225
250
275
ClevelandFed
AtlantaFed
New YorkFed
CoreCPI
May-2020 Dec-2019
LEFT CPI Consumer Price Index Core CPI excludes Food and Energy Cleveland Fed Cleveland 16 Trimmed Mean CPI Atlanta Fed StickyCPI New York Fed Underlying Inflation Gauge Source Federal Reserve Board Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GFC Global Financial Crisis Inflation curves derived from Inflation swaps Source Bloomberg Financial Fidelity Investments (AART) as of 6302018
Measures of US Inflation
Year-Over-Year
050
075
100
125
150
175
200
225
250
275
1 2 3 4 5 6 7 8 9 10 20 30Years
Expected CPI Year-Over-Year
US Inflation Expectations
June 2010
June 2020
GFC
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Federal Reserve Board NBER Bureau of Economic Analysis Haver Analytics Fidelity Investments (AART) as of 33120 RIGHT The 50 of households with the lowest incomes Source Federal Reserve Board Bureau of Economic Analysis World Inequality Data Haver Analytics Fidelity Investments (AART) as of 12311819
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
0
0
0
0
0
0
0
0
0
0
0
70
75
80
85
90
95
100
105
1993 1996 1999 2002 2005 2008 2011 2014 2017 2020
Non-Financial Corporate CreditRevenues
12
13
14
15
16
17
18
19
20
21
300
350
400
450
500
550
600
1976 1981 1986 1991 1996 2001 2006 2011 2016
Financial Assets Bottom 50 Household Income
Household Financial Assets and Income
Share of Household Income
US Corporate Debt
Ratio Share of Disposable Income
ECO
NO
MY
-$1000
$0
$1000
$2000
$3000
$4000
$5000
May
-201
1
Nov
-201
1
May
-201
2
Nov
-201
2
May
-201
3
Nov
-201
3
May
-201
4
Nov
-201
4
May
-201
5
Nov
-201
5
May
-201
6
Nov
-201
6
May
-201
7
Nov
-201
7
May
-201
8
Nov
-201
8
May
-201
9
Nov
-201
9
May
-202
0
UK Japan Eurozone US Total
20
Billions (12-Month Change)
QE Quantitative Easing Source Federal Reserve Bank of Japan European Central Bank Bank of England Haver Analytics Fidelity Investments (AART) as of 53120
Central Bank Balance Sheets
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
ECO
NO
MY
-20
-15
-10
-5
0
5
10
-100
-075
-050
-025
000
025
050
075
100
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
State and Local Government Federal Government Federal Budget Deficit
Source CBO BEA Haver Analytics 2020 and 2021 Budget Deficits are CBO projections (httpswwwcbogovsystemfiles2020-0456344-CBO-presentationpdf ) Fidelity Investments (AART) 21
Percent of GDP
US Federal Fiscal Deficit and Government Impact on GDP
Contribution to GDP
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
ECO
NO
MY
22 Ag Agriculture FDI Foreign direct investment ADR American depositary receipt Source Fidelity Investments (AART) as of 63020
US-China Relationship
Geopolitical Rivalry
Trade
Industrial Policy Issuesbull IT sectorbull Health carebull Supply chains
Strategic Competition
Policy Tools of De-Globalization
Military Hegemony
in Asia
Economic Advantage in
Key Areas
Consumer and Other
Goods
Bilateral Flashpointsbull Hong Kongbull Detention campsbull Taiwanbull South China Sea
Policy Action Categories Example
TariffTrade Barriers Raise tariffs to reduce imports
Export and FDI Restrictions Curtail high-tech exports
Industrial Policies Mandate supply chainonshoring
ImmigrationHuman Mobility Tighter borders
Financial Restrictions Penalties
US sanctions tax policies
InfoData Restrictions Chinas firewall
Portfolio Investment Restrictions
US de-lists Chinese ADRs
Politicized Debt Action Selective US default
BroadEconomic
Investment
TariffsMarket Accessbull Phase 1 ag deal
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
ECO
NO
MY
Risks
23
Business Cycle
Asset Allocation Implications
US is in process of emerging from a brief but sharp recession
Policymakers providing abundant support to markets and economy
Emphasize focus on diversified anddisciplined investment strategies
Members hold a wide range of views but see opportunities within asset classes
Opportunities include non-US assets US small cap and value equities TIPS and gold
For illustrative purposes only Diversification does not ensure a profit or guarantee against a loss Source Fidelity Investments (AART) as of 63020
The recovery remains highly uncertain given the size and exogenous nature of
the COVID shock
Policy actions are playing a larger role in driving financial market performance than
in past cycles
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
ASSE
TM
ARKE
TS
EM Emerging Markets EMEA Europe the Middle East and Africa For indexes and other important information used to represent above asset categories see Appendix Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged Sector returns represented by SampP 500 sectors Sector investing involves risk Because of its narrow focus sector investing may be more volatile than investing in more diversified baskets of securities Source Bloomberg Finance LP Fidelity Investments (AART) as of 6302025
US Equity Styles Total ReturnInternational Equities and Global Assets Total Return
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
For illustrative purposes only Past performance is no guarantee of future results Diversification does not ensure a profit or guarantee against a loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Fidelity proprietary analysis based on Monte Carlo simulations using historical index returns Domestic Equity Dow Jones US Total Stock Market Index Foreign Equity MSCI ACWI ex USA Index Investment Grade (IG) Bonds Bloomberg Barclays US Aggregate Bond Index High Yield (HY) Bonds ICE BofA US High Yield Index Source Fidelity Investments Morningstar Bloomberg Barclays data as of 63020
-10
-5
0
5
10
15
20
25
Early Mid Late Recession
US Stocks IG Bonds Cash
Annualized Real ReturnAnnualized Nominal Return
75th
percentile
25th
percentile
Median
Asset Class Performance by Cycle Phase (1950ndash2018)
10-Year Portfolio Return Distribution by Cycle Phase Starting Point
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
ASSE
TM
ARKE
TS
-40
-30
-20
-10
0
10
20
30
40
Jun-
12
Sep-
12
Dec
-12
Mar
-13
Jun-
13
Sep-
13
Dec
-13
Mar
-14
Jun-
14
Sep-
14
Dec
-14
Mar
-15
Jun-
15
Sep-
15
Dec
-15
Mar
-16
Jun-
16
Sep-
16
Dec
-16
Mar
-17
Jun-
17
Sep-
17
Dec
-17
Mar
-18
Jun-
18
Sep-
18
Dec
-18
Mar
-19
Jun-
19
Sep-
19
Dec
-19
Mar
-20
Jun-
20
EM DM US
27Past performance is no guarantee of future results DM Developed Markets EM Emerging Markets EPS Earnings per share Forward EPS Next 12 months expectations Source MSCI Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Global EPS Growth (Trailing 12 Months)
Forward EPS
53
01-49
Percent
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
ASSE
TM
ARKE
TS
0
5
10
15
20
25
2005 2008 2011 2014 2017 2020
DM Trailing PE EM Trailing PE US Trailing PE Forward PE
28
DM Non-US Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Price-to-earnings ratio (PE) stock price divided by earnings per share Also known as the multiple PE gives investors an idea of how much they are paying for a companyrsquos earnings power Long-term average PE for Emerging Markets includes data for 1988ndash2017 for Non-US Developed Markets 1973ndash2016 for the United States 1926ndash2017 Indexes DMmdashMSCI EAFE Index EMmdashMSCI EM Index United StatesmdashSampP 500 Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
EM
US
DM
DM Long-Term Average
US Long-Term Average
EM Long-Term Average
Global Stock Market PE Ratios
Ratio
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
ASSE
TM
ARKE
TS
0
10
20
30
40
50
60
70
80
90
100
Rus
sia
Turk
eySp
ain
Sout
h Ko
rea
UK
Indo
nesi
aC
hina
Aust
ralia EM
Braz
ilIta
lyM
exic
oG
erm
any
Philip
pine
sD
MFr
ance
Can
ada
Japa
nIn
dia
US
-35
-30
-25
-20
-15
-10
-5
0
5
10
GBP JPY CAD EUR CNY
29
DM Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information LEFT Price-to-earnings (PE) ratio (or multiple) stock price divided by earnings per share which indicates how much investors are paying for a companyrsquos earnings power Cyclically adjusted earnings are 10-year averages adjusted for inflation Source FactSet countriesrsquo statistical organizations Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GBPmdashBritish pound JPYmdashJapanese yen CADmdashCanadian dollar EURmdasheuro CNYmdashChinese yuanSource Federal Reserve Board Haver Analytics Fidelity Investments (AART) as of 63020
53120 20-Year Range
Valuation of Real Exchange Rates
Expensive vs $
Cheap vs $
Shiller CAPE
Last 12-Month Range 63020
Cyclically Adjusted PEs Valuation of Major Currencies vs USD
Non-US Equity and Forex Valuations Relatively AttractiveCyclically adjusted PE (CAPE) ratios for international developed-market and emerging-market equities remained below US valuations providing a relatively favorable long-term backdrop for non-US stocks In Q2 the US dollar depreciated against many of the worldrsquos major currencies nevertheless US dollar valuations remain relatively expensive overall
ASSE
TM
ARKE
TS
LEFT TIPS Treasury Inflation-Protected Securities SOURCE Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Source CME Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 6302030
00
05
10
15
20
25
30
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
10 Year LT Average (Since 1998)
US Treasury Breakeven Inflation Rates
Yield
$0
$20
$40
$60
$80
$100
$120
$140
$160
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
WTI Crude Oil
Inflation Adjusted Price (March 2020 Dollars)
Real Oil Price
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
ASSE
TM
ARKE
TS
31
Past performance is no guarantee of future results Sectors as defined by GICS White line is a theoretical representation of the business cycle as it moves through early mid late and recession phases Green and red shaded portions above respectively represent over- or underperformance relative to the broader market unshaded (white) portions suggest no clear pattern of over- or underperformance Double +ndash signs indicate that the sector is showing a consistent signal across all three metrics full-phase average performance median monthly difference and cycle hit rate A single +ndash indicates a mixed or less consistent signal Return data from 1962 to 2016 Source Fidelity Investments (AART) as of 63020
Business-Cycle Approach to SectorsSector EARLY CYCLE
Economically sensitive sectors may tend to outperform while more defensive sectors have
tended to underperform
Making marginal portfolio allocation changes to manage
drawdown risk with sectorsmay enhance risk-adjusted
returns during this cycle
Defensive and inflation-resistantsectors tend to perform better
while more cyclical sectors underperform
Since performance is generally negative in
recessions investors should focus on the most defensive
historically stable sectors
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
ASSE
TM
ARKE
TS
400
420
440
460
480
500
520
540
092
094
096
098
100
102
104
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18D
ec-1
8M
ar-1
9Ju
n-19
Sep-
19D
ec-1
9M
ar-2
0Ju
n-20
Value vs Growth Performance CRB Raw Industrials Index
LEFT Gray bars represent US recessions as defined by NBER Asset classes represented by Value Fidelity Value ETF Growth Russell 1000reg
Growth Index Commodity Prices CRB Raw Industrials Index Source Federal Reserve Board NBER Haver Analytics Bloomberg Finance LP Fidelity Investments (AART) as of 63020 RIGHT Asset classes represented by Growth Russell 1000reg Growth Index Value Russell 1000reg Value Index Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020 Past performance is no guarantee of future results All indexes are unmanaged You cannot invest directly in an index Unlike mutual funds ETF shares are bought and sold at market price which may be higher or lower than their NAV and are not individually redeemed from the fund32
Value Equity More Attractive after Long UnderperformanceOn a cyclical basis the relative performance of value stocks has tended to correlate generally with the direction of the global economy and in particular with commodity prices which may be bottoming after the worldwide COVID-19 shutdown Meanwhile after a decade of trailing other leading factors and styles valuersquos relative valuations are at their most attractive in roughly 20 years
Price-to-Book Valuation SpreadsValue Relative Performance vs Commodity Prices
Ratio PB RatioIndex
0
1
2
3
4
5
6
7
8
9
10
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Growth vs Value
ASSE
TM
ARKE
TS
33
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Percentile ranks of yields and spreads based on historical period from 1993 to 2020 MBS mortgage-backed securities Source Bloomberg Barclays Bank of America Merrill Lynch JP Morgan Fidelity Investments (AART) as of 63020
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Conference Board Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Other industries most impacted shaded in blue include For GDP Recreation Services Autos Transportation Services Recreation Goods Clothing Gasoline Furnishings For Employment Retail Transportation Source Conference Board NBER Haver Analytics Fidelity Investments (AART) as of 2292015
Restaurants and Hotels
Leisure and Hospitality
0
5
10
15
20
25
GDP Private Employment
Largest Affected Industry Other
Sectors Most Impacted by COVID-19
Share
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Consumer Sentiment
00
1
2
3
4
5
6
7
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
2020
Consumer ExpectationsPresent Situation
Ratio
ECO
NO
MY
ldquoFastrdquo reopening states include Arizona Florida Georgia and Texas ldquoSlowrdquo reopening states include Massachusetts New York and New Jersey LEFT Source Johns Hopkins University Haver Analytics Fidelity Investments (AART) as of 7320 RIGHT Baseline is defined as the median for that day of the week during the period 1420ndash13120 Source OpenTable Homebase Haver Analytics Fidelity Investments (AART) as of 62620
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
Hours Worked byEmployees
Local BusinessesOpen
OpenTableReservations YoY
April Trough 62620 61820
Cases (Five Day Moving Average)
New COVID-19 Cases Daily Data in ldquoFastrdquo Reopening States
Hours and Businesses (0 = Baseline) Year-Over-Year
16
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
0
1000
2000
3000
4000
5000
6000
7000
8000
33
203
102
03
172
03
242
03
312
04
720
414
20
421
20
428
20
55
205
122
05
192
05
262
06
220
69
206
162
06
232
06
302
0
Fast Reopening States Slow Reopening States
ECO
NO
MY
-30
-20
-10
0
10
20
30
Jun-19 Sep-19 Dec-19 Mar-20 Jun-20
2020 2021
40
50
60
70
80
90
100
110
120
-12 -9 -6 -3 0 3 6 9 12 15 18 21 24 27 30 33 36
Months (t=0 is start of recession)
Average since 1980 2007ndash20082020ndash22 Consensus Estimate
LEFT AND RIGHT EPS Earnings per share Past performance is no guarantee of future results Source Bloomberg Finance LP Fidelity Investments (AART) Haver Analytics as of 6252017
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
ECO
NO
MY
050
075
100
125
150
175
200
225
250
275
ClevelandFed
AtlantaFed
New YorkFed
CoreCPI
May-2020 Dec-2019
LEFT CPI Consumer Price Index Core CPI excludes Food and Energy Cleveland Fed Cleveland 16 Trimmed Mean CPI Atlanta Fed StickyCPI New York Fed Underlying Inflation Gauge Source Federal Reserve Board Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GFC Global Financial Crisis Inflation curves derived from Inflation swaps Source Bloomberg Financial Fidelity Investments (AART) as of 6302018
Measures of US Inflation
Year-Over-Year
050
075
100
125
150
175
200
225
250
275
1 2 3 4 5 6 7 8 9 10 20 30Years
Expected CPI Year-Over-Year
US Inflation Expectations
June 2010
June 2020
GFC
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Federal Reserve Board NBER Bureau of Economic Analysis Haver Analytics Fidelity Investments (AART) as of 33120 RIGHT The 50 of households with the lowest incomes Source Federal Reserve Board Bureau of Economic Analysis World Inequality Data Haver Analytics Fidelity Investments (AART) as of 12311819
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
0
0
0
0
0
0
0
0
0
0
0
70
75
80
85
90
95
100
105
1993 1996 1999 2002 2005 2008 2011 2014 2017 2020
Non-Financial Corporate CreditRevenues
12
13
14
15
16
17
18
19
20
21
300
350
400
450
500
550
600
1976 1981 1986 1991 1996 2001 2006 2011 2016
Financial Assets Bottom 50 Household Income
Household Financial Assets and Income
Share of Household Income
US Corporate Debt
Ratio Share of Disposable Income
ECO
NO
MY
-$1000
$0
$1000
$2000
$3000
$4000
$5000
May
-201
1
Nov
-201
1
May
-201
2
Nov
-201
2
May
-201
3
Nov
-201
3
May
-201
4
Nov
-201
4
May
-201
5
Nov
-201
5
May
-201
6
Nov
-201
6
May
-201
7
Nov
-201
7
May
-201
8
Nov
-201
8
May
-201
9
Nov
-201
9
May
-202
0
UK Japan Eurozone US Total
20
Billions (12-Month Change)
QE Quantitative Easing Source Federal Reserve Bank of Japan European Central Bank Bank of England Haver Analytics Fidelity Investments (AART) as of 53120
Central Bank Balance Sheets
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
ECO
NO
MY
-20
-15
-10
-5
0
5
10
-100
-075
-050
-025
000
025
050
075
100
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
State and Local Government Federal Government Federal Budget Deficit
Source CBO BEA Haver Analytics 2020 and 2021 Budget Deficits are CBO projections (httpswwwcbogovsystemfiles2020-0456344-CBO-presentationpdf ) Fidelity Investments (AART) 21
Percent of GDP
US Federal Fiscal Deficit and Government Impact on GDP
Contribution to GDP
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
ECO
NO
MY
22 Ag Agriculture FDI Foreign direct investment ADR American depositary receipt Source Fidelity Investments (AART) as of 63020
US-China Relationship
Geopolitical Rivalry
Trade
Industrial Policy Issuesbull IT sectorbull Health carebull Supply chains
Strategic Competition
Policy Tools of De-Globalization
Military Hegemony
in Asia
Economic Advantage in
Key Areas
Consumer and Other
Goods
Bilateral Flashpointsbull Hong Kongbull Detention campsbull Taiwanbull South China Sea
Policy Action Categories Example
TariffTrade Barriers Raise tariffs to reduce imports
Export and FDI Restrictions Curtail high-tech exports
Industrial Policies Mandate supply chainonshoring
ImmigrationHuman Mobility Tighter borders
Financial Restrictions Penalties
US sanctions tax policies
InfoData Restrictions Chinas firewall
Portfolio Investment Restrictions
US de-lists Chinese ADRs
Politicized Debt Action Selective US default
BroadEconomic
Investment
TariffsMarket Accessbull Phase 1 ag deal
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
ECO
NO
MY
Risks
23
Business Cycle
Asset Allocation Implications
US is in process of emerging from a brief but sharp recession
Policymakers providing abundant support to markets and economy
Emphasize focus on diversified anddisciplined investment strategies
Members hold a wide range of views but see opportunities within asset classes
Opportunities include non-US assets US small cap and value equities TIPS and gold
For illustrative purposes only Diversification does not ensure a profit or guarantee against a loss Source Fidelity Investments (AART) as of 63020
The recovery remains highly uncertain given the size and exogenous nature of
the COVID shock
Policy actions are playing a larger role in driving financial market performance than
in past cycles
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
ASSE
TM
ARKE
TS
EM Emerging Markets EMEA Europe the Middle East and Africa For indexes and other important information used to represent above asset categories see Appendix Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged Sector returns represented by SampP 500 sectors Sector investing involves risk Because of its narrow focus sector investing may be more volatile than investing in more diversified baskets of securities Source Bloomberg Finance LP Fidelity Investments (AART) as of 6302025
US Equity Styles Total ReturnInternational Equities and Global Assets Total Return
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
For illustrative purposes only Past performance is no guarantee of future results Diversification does not ensure a profit or guarantee against a loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Fidelity proprietary analysis based on Monte Carlo simulations using historical index returns Domestic Equity Dow Jones US Total Stock Market Index Foreign Equity MSCI ACWI ex USA Index Investment Grade (IG) Bonds Bloomberg Barclays US Aggregate Bond Index High Yield (HY) Bonds ICE BofA US High Yield Index Source Fidelity Investments Morningstar Bloomberg Barclays data as of 63020
-10
-5
0
5
10
15
20
25
Early Mid Late Recession
US Stocks IG Bonds Cash
Annualized Real ReturnAnnualized Nominal Return
75th
percentile
25th
percentile
Median
Asset Class Performance by Cycle Phase (1950ndash2018)
10-Year Portfolio Return Distribution by Cycle Phase Starting Point
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
ASSE
TM
ARKE
TS
-40
-30
-20
-10
0
10
20
30
40
Jun-
12
Sep-
12
Dec
-12
Mar
-13
Jun-
13
Sep-
13
Dec
-13
Mar
-14
Jun-
14
Sep-
14
Dec
-14
Mar
-15
Jun-
15
Sep-
15
Dec
-15
Mar
-16
Jun-
16
Sep-
16
Dec
-16
Mar
-17
Jun-
17
Sep-
17
Dec
-17
Mar
-18
Jun-
18
Sep-
18
Dec
-18
Mar
-19
Jun-
19
Sep-
19
Dec
-19
Mar
-20
Jun-
20
EM DM US
27Past performance is no guarantee of future results DM Developed Markets EM Emerging Markets EPS Earnings per share Forward EPS Next 12 months expectations Source MSCI Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Global EPS Growth (Trailing 12 Months)
Forward EPS
53
01-49
Percent
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
ASSE
TM
ARKE
TS
0
5
10
15
20
25
2005 2008 2011 2014 2017 2020
DM Trailing PE EM Trailing PE US Trailing PE Forward PE
28
DM Non-US Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Price-to-earnings ratio (PE) stock price divided by earnings per share Also known as the multiple PE gives investors an idea of how much they are paying for a companyrsquos earnings power Long-term average PE for Emerging Markets includes data for 1988ndash2017 for Non-US Developed Markets 1973ndash2016 for the United States 1926ndash2017 Indexes DMmdashMSCI EAFE Index EMmdashMSCI EM Index United StatesmdashSampP 500 Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
EM
US
DM
DM Long-Term Average
US Long-Term Average
EM Long-Term Average
Global Stock Market PE Ratios
Ratio
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
ASSE
TM
ARKE
TS
0
10
20
30
40
50
60
70
80
90
100
Rus
sia
Turk
eySp
ain
Sout
h Ko
rea
UK
Indo
nesi
aC
hina
Aust
ralia EM
Braz
ilIta
lyM
exic
oG
erm
any
Philip
pine
sD
MFr
ance
Can
ada
Japa
nIn
dia
US
-35
-30
-25
-20
-15
-10
-5
0
5
10
GBP JPY CAD EUR CNY
29
DM Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information LEFT Price-to-earnings (PE) ratio (or multiple) stock price divided by earnings per share which indicates how much investors are paying for a companyrsquos earnings power Cyclically adjusted earnings are 10-year averages adjusted for inflation Source FactSet countriesrsquo statistical organizations Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GBPmdashBritish pound JPYmdashJapanese yen CADmdashCanadian dollar EURmdasheuro CNYmdashChinese yuanSource Federal Reserve Board Haver Analytics Fidelity Investments (AART) as of 63020
53120 20-Year Range
Valuation of Real Exchange Rates
Expensive vs $
Cheap vs $
Shiller CAPE
Last 12-Month Range 63020
Cyclically Adjusted PEs Valuation of Major Currencies vs USD
Non-US Equity and Forex Valuations Relatively AttractiveCyclically adjusted PE (CAPE) ratios for international developed-market and emerging-market equities remained below US valuations providing a relatively favorable long-term backdrop for non-US stocks In Q2 the US dollar depreciated against many of the worldrsquos major currencies nevertheless US dollar valuations remain relatively expensive overall
ASSE
TM
ARKE
TS
LEFT TIPS Treasury Inflation-Protected Securities SOURCE Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Source CME Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 6302030
00
05
10
15
20
25
30
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
10 Year LT Average (Since 1998)
US Treasury Breakeven Inflation Rates
Yield
$0
$20
$40
$60
$80
$100
$120
$140
$160
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
WTI Crude Oil
Inflation Adjusted Price (March 2020 Dollars)
Real Oil Price
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
ASSE
TM
ARKE
TS
31
Past performance is no guarantee of future results Sectors as defined by GICS White line is a theoretical representation of the business cycle as it moves through early mid late and recession phases Green and red shaded portions above respectively represent over- or underperformance relative to the broader market unshaded (white) portions suggest no clear pattern of over- or underperformance Double +ndash signs indicate that the sector is showing a consistent signal across all three metrics full-phase average performance median monthly difference and cycle hit rate A single +ndash indicates a mixed or less consistent signal Return data from 1962 to 2016 Source Fidelity Investments (AART) as of 63020
Business-Cycle Approach to SectorsSector EARLY CYCLE
Economically sensitive sectors may tend to outperform while more defensive sectors have
tended to underperform
Making marginal portfolio allocation changes to manage
drawdown risk with sectorsmay enhance risk-adjusted
returns during this cycle
Defensive and inflation-resistantsectors tend to perform better
while more cyclical sectors underperform
Since performance is generally negative in
recessions investors should focus on the most defensive
historically stable sectors
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
ASSE
TM
ARKE
TS
400
420
440
460
480
500
520
540
092
094
096
098
100
102
104
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18D
ec-1
8M
ar-1
9Ju
n-19
Sep-
19D
ec-1
9M
ar-2
0Ju
n-20
Value vs Growth Performance CRB Raw Industrials Index
LEFT Gray bars represent US recessions as defined by NBER Asset classes represented by Value Fidelity Value ETF Growth Russell 1000reg
Growth Index Commodity Prices CRB Raw Industrials Index Source Federal Reserve Board NBER Haver Analytics Bloomberg Finance LP Fidelity Investments (AART) as of 63020 RIGHT Asset classes represented by Growth Russell 1000reg Growth Index Value Russell 1000reg Value Index Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020 Past performance is no guarantee of future results All indexes are unmanaged You cannot invest directly in an index Unlike mutual funds ETF shares are bought and sold at market price which may be higher or lower than their NAV and are not individually redeemed from the fund32
Value Equity More Attractive after Long UnderperformanceOn a cyclical basis the relative performance of value stocks has tended to correlate generally with the direction of the global economy and in particular with commodity prices which may be bottoming after the worldwide COVID-19 shutdown Meanwhile after a decade of trailing other leading factors and styles valuersquos relative valuations are at their most attractive in roughly 20 years
Price-to-Book Valuation SpreadsValue Relative Performance vs Commodity Prices
Ratio PB RatioIndex
0
1
2
3
4
5
6
7
8
9
10
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Growth vs Value
ASSE
TM
ARKE
TS
33
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Percentile ranks of yields and spreads based on historical period from 1993 to 2020 MBS mortgage-backed securities Source Bloomberg Barclays Bank of America Merrill Lynch JP Morgan Fidelity Investments (AART) as of 63020
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
ECO
NO
MY
ldquoFastrdquo reopening states include Arizona Florida Georgia and Texas ldquoSlowrdquo reopening states include Massachusetts New York and New Jersey LEFT Source Johns Hopkins University Haver Analytics Fidelity Investments (AART) as of 7320 RIGHT Baseline is defined as the median for that day of the week during the period 1420ndash13120 Source OpenTable Homebase Haver Analytics Fidelity Investments (AART) as of 62620
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
Hours Worked byEmployees
Local BusinessesOpen
OpenTableReservations YoY
April Trough 62620 61820
Cases (Five Day Moving Average)
New COVID-19 Cases Daily Data in ldquoFastrdquo Reopening States
Hours and Businesses (0 = Baseline) Year-Over-Year
16
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
0
1000
2000
3000
4000
5000
6000
7000
8000
33
203
102
03
172
03
242
03
312
04
720
414
20
421
20
428
20
55
205
122
05
192
05
262
06
220
69
206
162
06
232
06
302
0
Fast Reopening States Slow Reopening States
ECO
NO
MY
-30
-20
-10
0
10
20
30
Jun-19 Sep-19 Dec-19 Mar-20 Jun-20
2020 2021
40
50
60
70
80
90
100
110
120
-12 -9 -6 -3 0 3 6 9 12 15 18 21 24 27 30 33 36
Months (t=0 is start of recession)
Average since 1980 2007ndash20082020ndash22 Consensus Estimate
LEFT AND RIGHT EPS Earnings per share Past performance is no guarantee of future results Source Bloomberg Finance LP Fidelity Investments (AART) Haver Analytics as of 6252017
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
ECO
NO
MY
050
075
100
125
150
175
200
225
250
275
ClevelandFed
AtlantaFed
New YorkFed
CoreCPI
May-2020 Dec-2019
LEFT CPI Consumer Price Index Core CPI excludes Food and Energy Cleveland Fed Cleveland 16 Trimmed Mean CPI Atlanta Fed StickyCPI New York Fed Underlying Inflation Gauge Source Federal Reserve Board Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GFC Global Financial Crisis Inflation curves derived from Inflation swaps Source Bloomberg Financial Fidelity Investments (AART) as of 6302018
Measures of US Inflation
Year-Over-Year
050
075
100
125
150
175
200
225
250
275
1 2 3 4 5 6 7 8 9 10 20 30Years
Expected CPI Year-Over-Year
US Inflation Expectations
June 2010
June 2020
GFC
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Federal Reserve Board NBER Bureau of Economic Analysis Haver Analytics Fidelity Investments (AART) as of 33120 RIGHT The 50 of households with the lowest incomes Source Federal Reserve Board Bureau of Economic Analysis World Inequality Data Haver Analytics Fidelity Investments (AART) as of 12311819
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
0
0
0
0
0
0
0
0
0
0
0
70
75
80
85
90
95
100
105
1993 1996 1999 2002 2005 2008 2011 2014 2017 2020
Non-Financial Corporate CreditRevenues
12
13
14
15
16
17
18
19
20
21
300
350
400
450
500
550
600
1976 1981 1986 1991 1996 2001 2006 2011 2016
Financial Assets Bottom 50 Household Income
Household Financial Assets and Income
Share of Household Income
US Corporate Debt
Ratio Share of Disposable Income
ECO
NO
MY
-$1000
$0
$1000
$2000
$3000
$4000
$5000
May
-201
1
Nov
-201
1
May
-201
2
Nov
-201
2
May
-201
3
Nov
-201
3
May
-201
4
Nov
-201
4
May
-201
5
Nov
-201
5
May
-201
6
Nov
-201
6
May
-201
7
Nov
-201
7
May
-201
8
Nov
-201
8
May
-201
9
Nov
-201
9
May
-202
0
UK Japan Eurozone US Total
20
Billions (12-Month Change)
QE Quantitative Easing Source Federal Reserve Bank of Japan European Central Bank Bank of England Haver Analytics Fidelity Investments (AART) as of 53120
Central Bank Balance Sheets
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
ECO
NO
MY
-20
-15
-10
-5
0
5
10
-100
-075
-050
-025
000
025
050
075
100
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
State and Local Government Federal Government Federal Budget Deficit
Source CBO BEA Haver Analytics 2020 and 2021 Budget Deficits are CBO projections (httpswwwcbogovsystemfiles2020-0456344-CBO-presentationpdf ) Fidelity Investments (AART) 21
Percent of GDP
US Federal Fiscal Deficit and Government Impact on GDP
Contribution to GDP
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
ECO
NO
MY
22 Ag Agriculture FDI Foreign direct investment ADR American depositary receipt Source Fidelity Investments (AART) as of 63020
US-China Relationship
Geopolitical Rivalry
Trade
Industrial Policy Issuesbull IT sectorbull Health carebull Supply chains
Strategic Competition
Policy Tools of De-Globalization
Military Hegemony
in Asia
Economic Advantage in
Key Areas
Consumer and Other
Goods
Bilateral Flashpointsbull Hong Kongbull Detention campsbull Taiwanbull South China Sea
Policy Action Categories Example
TariffTrade Barriers Raise tariffs to reduce imports
Export and FDI Restrictions Curtail high-tech exports
Industrial Policies Mandate supply chainonshoring
ImmigrationHuman Mobility Tighter borders
Financial Restrictions Penalties
US sanctions tax policies
InfoData Restrictions Chinas firewall
Portfolio Investment Restrictions
US de-lists Chinese ADRs
Politicized Debt Action Selective US default
BroadEconomic
Investment
TariffsMarket Accessbull Phase 1 ag deal
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
ECO
NO
MY
Risks
23
Business Cycle
Asset Allocation Implications
US is in process of emerging from a brief but sharp recession
Policymakers providing abundant support to markets and economy
Emphasize focus on diversified anddisciplined investment strategies
Members hold a wide range of views but see opportunities within asset classes
Opportunities include non-US assets US small cap and value equities TIPS and gold
For illustrative purposes only Diversification does not ensure a profit or guarantee against a loss Source Fidelity Investments (AART) as of 63020
The recovery remains highly uncertain given the size and exogenous nature of
the COVID shock
Policy actions are playing a larger role in driving financial market performance than
in past cycles
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
ASSE
TM
ARKE
TS
EM Emerging Markets EMEA Europe the Middle East and Africa For indexes and other important information used to represent above asset categories see Appendix Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged Sector returns represented by SampP 500 sectors Sector investing involves risk Because of its narrow focus sector investing may be more volatile than investing in more diversified baskets of securities Source Bloomberg Finance LP Fidelity Investments (AART) as of 6302025
US Equity Styles Total ReturnInternational Equities and Global Assets Total Return
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
For illustrative purposes only Past performance is no guarantee of future results Diversification does not ensure a profit or guarantee against a loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Fidelity proprietary analysis based on Monte Carlo simulations using historical index returns Domestic Equity Dow Jones US Total Stock Market Index Foreign Equity MSCI ACWI ex USA Index Investment Grade (IG) Bonds Bloomberg Barclays US Aggregate Bond Index High Yield (HY) Bonds ICE BofA US High Yield Index Source Fidelity Investments Morningstar Bloomberg Barclays data as of 63020
-10
-5
0
5
10
15
20
25
Early Mid Late Recession
US Stocks IG Bonds Cash
Annualized Real ReturnAnnualized Nominal Return
75th
percentile
25th
percentile
Median
Asset Class Performance by Cycle Phase (1950ndash2018)
10-Year Portfolio Return Distribution by Cycle Phase Starting Point
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
ASSE
TM
ARKE
TS
-40
-30
-20
-10
0
10
20
30
40
Jun-
12
Sep-
12
Dec
-12
Mar
-13
Jun-
13
Sep-
13
Dec
-13
Mar
-14
Jun-
14
Sep-
14
Dec
-14
Mar
-15
Jun-
15
Sep-
15
Dec
-15
Mar
-16
Jun-
16
Sep-
16
Dec
-16
Mar
-17
Jun-
17
Sep-
17
Dec
-17
Mar
-18
Jun-
18
Sep-
18
Dec
-18
Mar
-19
Jun-
19
Sep-
19
Dec
-19
Mar
-20
Jun-
20
EM DM US
27Past performance is no guarantee of future results DM Developed Markets EM Emerging Markets EPS Earnings per share Forward EPS Next 12 months expectations Source MSCI Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Global EPS Growth (Trailing 12 Months)
Forward EPS
53
01-49
Percent
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
ASSE
TM
ARKE
TS
0
5
10
15
20
25
2005 2008 2011 2014 2017 2020
DM Trailing PE EM Trailing PE US Trailing PE Forward PE
28
DM Non-US Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Price-to-earnings ratio (PE) stock price divided by earnings per share Also known as the multiple PE gives investors an idea of how much they are paying for a companyrsquos earnings power Long-term average PE for Emerging Markets includes data for 1988ndash2017 for Non-US Developed Markets 1973ndash2016 for the United States 1926ndash2017 Indexes DMmdashMSCI EAFE Index EMmdashMSCI EM Index United StatesmdashSampP 500 Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
EM
US
DM
DM Long-Term Average
US Long-Term Average
EM Long-Term Average
Global Stock Market PE Ratios
Ratio
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
ASSE
TM
ARKE
TS
0
10
20
30
40
50
60
70
80
90
100
Rus
sia
Turk
eySp
ain
Sout
h Ko
rea
UK
Indo
nesi
aC
hina
Aust
ralia EM
Braz
ilIta
lyM
exic
oG
erm
any
Philip
pine
sD
MFr
ance
Can
ada
Japa
nIn
dia
US
-35
-30
-25
-20
-15
-10
-5
0
5
10
GBP JPY CAD EUR CNY
29
DM Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information LEFT Price-to-earnings (PE) ratio (or multiple) stock price divided by earnings per share which indicates how much investors are paying for a companyrsquos earnings power Cyclically adjusted earnings are 10-year averages adjusted for inflation Source FactSet countriesrsquo statistical organizations Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GBPmdashBritish pound JPYmdashJapanese yen CADmdashCanadian dollar EURmdasheuro CNYmdashChinese yuanSource Federal Reserve Board Haver Analytics Fidelity Investments (AART) as of 63020
53120 20-Year Range
Valuation of Real Exchange Rates
Expensive vs $
Cheap vs $
Shiller CAPE
Last 12-Month Range 63020
Cyclically Adjusted PEs Valuation of Major Currencies vs USD
Non-US Equity and Forex Valuations Relatively AttractiveCyclically adjusted PE (CAPE) ratios for international developed-market and emerging-market equities remained below US valuations providing a relatively favorable long-term backdrop for non-US stocks In Q2 the US dollar depreciated against many of the worldrsquos major currencies nevertheless US dollar valuations remain relatively expensive overall
ASSE
TM
ARKE
TS
LEFT TIPS Treasury Inflation-Protected Securities SOURCE Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Source CME Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 6302030
00
05
10
15
20
25
30
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
10 Year LT Average (Since 1998)
US Treasury Breakeven Inflation Rates
Yield
$0
$20
$40
$60
$80
$100
$120
$140
$160
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
WTI Crude Oil
Inflation Adjusted Price (March 2020 Dollars)
Real Oil Price
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
ASSE
TM
ARKE
TS
31
Past performance is no guarantee of future results Sectors as defined by GICS White line is a theoretical representation of the business cycle as it moves through early mid late and recession phases Green and red shaded portions above respectively represent over- or underperformance relative to the broader market unshaded (white) portions suggest no clear pattern of over- or underperformance Double +ndash signs indicate that the sector is showing a consistent signal across all three metrics full-phase average performance median monthly difference and cycle hit rate A single +ndash indicates a mixed or less consistent signal Return data from 1962 to 2016 Source Fidelity Investments (AART) as of 63020
Business-Cycle Approach to SectorsSector EARLY CYCLE
Economically sensitive sectors may tend to outperform while more defensive sectors have
tended to underperform
Making marginal portfolio allocation changes to manage
drawdown risk with sectorsmay enhance risk-adjusted
returns during this cycle
Defensive and inflation-resistantsectors tend to perform better
while more cyclical sectors underperform
Since performance is generally negative in
recessions investors should focus on the most defensive
historically stable sectors
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
ASSE
TM
ARKE
TS
400
420
440
460
480
500
520
540
092
094
096
098
100
102
104
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18D
ec-1
8M
ar-1
9Ju
n-19
Sep-
19D
ec-1
9M
ar-2
0Ju
n-20
Value vs Growth Performance CRB Raw Industrials Index
LEFT Gray bars represent US recessions as defined by NBER Asset classes represented by Value Fidelity Value ETF Growth Russell 1000reg
Growth Index Commodity Prices CRB Raw Industrials Index Source Federal Reserve Board NBER Haver Analytics Bloomberg Finance LP Fidelity Investments (AART) as of 63020 RIGHT Asset classes represented by Growth Russell 1000reg Growth Index Value Russell 1000reg Value Index Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020 Past performance is no guarantee of future results All indexes are unmanaged You cannot invest directly in an index Unlike mutual funds ETF shares are bought and sold at market price which may be higher or lower than their NAV and are not individually redeemed from the fund32
Value Equity More Attractive after Long UnderperformanceOn a cyclical basis the relative performance of value stocks has tended to correlate generally with the direction of the global economy and in particular with commodity prices which may be bottoming after the worldwide COVID-19 shutdown Meanwhile after a decade of trailing other leading factors and styles valuersquos relative valuations are at their most attractive in roughly 20 years
Price-to-Book Valuation SpreadsValue Relative Performance vs Commodity Prices
Ratio PB RatioIndex
0
1
2
3
4
5
6
7
8
9
10
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Growth vs Value
ASSE
TM
ARKE
TS
33
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Percentile ranks of yields and spreads based on historical period from 1993 to 2020 MBS mortgage-backed securities Source Bloomberg Barclays Bank of America Merrill Lynch JP Morgan Fidelity Investments (AART) as of 63020
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
ECO
NO
MY
-30
-20
-10
0
10
20
30
Jun-19 Sep-19 Dec-19 Mar-20 Jun-20
2020 2021
40
50
60
70
80
90
100
110
120
-12 -9 -6 -3 0 3 6 9 12 15 18 21 24 27 30 33 36
Months (t=0 is start of recession)
Average since 1980 2007ndash20082020ndash22 Consensus Estimate
LEFT AND RIGHT EPS Earnings per share Past performance is no guarantee of future results Source Bloomberg Finance LP Fidelity Investments (AART) Haver Analytics as of 6252017
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
ECO
NO
MY
050
075
100
125
150
175
200
225
250
275
ClevelandFed
AtlantaFed
New YorkFed
CoreCPI
May-2020 Dec-2019
LEFT CPI Consumer Price Index Core CPI excludes Food and Energy Cleveland Fed Cleveland 16 Trimmed Mean CPI Atlanta Fed StickyCPI New York Fed Underlying Inflation Gauge Source Federal Reserve Board Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GFC Global Financial Crisis Inflation curves derived from Inflation swaps Source Bloomberg Financial Fidelity Investments (AART) as of 6302018
Measures of US Inflation
Year-Over-Year
050
075
100
125
150
175
200
225
250
275
1 2 3 4 5 6 7 8 9 10 20 30Years
Expected CPI Year-Over-Year
US Inflation Expectations
June 2010
June 2020
GFC
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Federal Reserve Board NBER Bureau of Economic Analysis Haver Analytics Fidelity Investments (AART) as of 33120 RIGHT The 50 of households with the lowest incomes Source Federal Reserve Board Bureau of Economic Analysis World Inequality Data Haver Analytics Fidelity Investments (AART) as of 12311819
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
0
0
0
0
0
0
0
0
0
0
0
70
75
80
85
90
95
100
105
1993 1996 1999 2002 2005 2008 2011 2014 2017 2020
Non-Financial Corporate CreditRevenues
12
13
14
15
16
17
18
19
20
21
300
350
400
450
500
550
600
1976 1981 1986 1991 1996 2001 2006 2011 2016
Financial Assets Bottom 50 Household Income
Household Financial Assets and Income
Share of Household Income
US Corporate Debt
Ratio Share of Disposable Income
ECO
NO
MY
-$1000
$0
$1000
$2000
$3000
$4000
$5000
May
-201
1
Nov
-201
1
May
-201
2
Nov
-201
2
May
-201
3
Nov
-201
3
May
-201
4
Nov
-201
4
May
-201
5
Nov
-201
5
May
-201
6
Nov
-201
6
May
-201
7
Nov
-201
7
May
-201
8
Nov
-201
8
May
-201
9
Nov
-201
9
May
-202
0
UK Japan Eurozone US Total
20
Billions (12-Month Change)
QE Quantitative Easing Source Federal Reserve Bank of Japan European Central Bank Bank of England Haver Analytics Fidelity Investments (AART) as of 53120
Central Bank Balance Sheets
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
ECO
NO
MY
-20
-15
-10
-5
0
5
10
-100
-075
-050
-025
000
025
050
075
100
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
State and Local Government Federal Government Federal Budget Deficit
Source CBO BEA Haver Analytics 2020 and 2021 Budget Deficits are CBO projections (httpswwwcbogovsystemfiles2020-0456344-CBO-presentationpdf ) Fidelity Investments (AART) 21
Percent of GDP
US Federal Fiscal Deficit and Government Impact on GDP
Contribution to GDP
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
ECO
NO
MY
22 Ag Agriculture FDI Foreign direct investment ADR American depositary receipt Source Fidelity Investments (AART) as of 63020
US-China Relationship
Geopolitical Rivalry
Trade
Industrial Policy Issuesbull IT sectorbull Health carebull Supply chains
Strategic Competition
Policy Tools of De-Globalization
Military Hegemony
in Asia
Economic Advantage in
Key Areas
Consumer and Other
Goods
Bilateral Flashpointsbull Hong Kongbull Detention campsbull Taiwanbull South China Sea
Policy Action Categories Example
TariffTrade Barriers Raise tariffs to reduce imports
Export and FDI Restrictions Curtail high-tech exports
Industrial Policies Mandate supply chainonshoring
ImmigrationHuman Mobility Tighter borders
Financial Restrictions Penalties
US sanctions tax policies
InfoData Restrictions Chinas firewall
Portfolio Investment Restrictions
US de-lists Chinese ADRs
Politicized Debt Action Selective US default
BroadEconomic
Investment
TariffsMarket Accessbull Phase 1 ag deal
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
ECO
NO
MY
Risks
23
Business Cycle
Asset Allocation Implications
US is in process of emerging from a brief but sharp recession
Policymakers providing abundant support to markets and economy
Emphasize focus on diversified anddisciplined investment strategies
Members hold a wide range of views but see opportunities within asset classes
Opportunities include non-US assets US small cap and value equities TIPS and gold
For illustrative purposes only Diversification does not ensure a profit or guarantee against a loss Source Fidelity Investments (AART) as of 63020
The recovery remains highly uncertain given the size and exogenous nature of
the COVID shock
Policy actions are playing a larger role in driving financial market performance than
in past cycles
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
ASSE
TM
ARKE
TS
EM Emerging Markets EMEA Europe the Middle East and Africa For indexes and other important information used to represent above asset categories see Appendix Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged Sector returns represented by SampP 500 sectors Sector investing involves risk Because of its narrow focus sector investing may be more volatile than investing in more diversified baskets of securities Source Bloomberg Finance LP Fidelity Investments (AART) as of 6302025
US Equity Styles Total ReturnInternational Equities and Global Assets Total Return
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
For illustrative purposes only Past performance is no guarantee of future results Diversification does not ensure a profit or guarantee against a loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Fidelity proprietary analysis based on Monte Carlo simulations using historical index returns Domestic Equity Dow Jones US Total Stock Market Index Foreign Equity MSCI ACWI ex USA Index Investment Grade (IG) Bonds Bloomberg Barclays US Aggregate Bond Index High Yield (HY) Bonds ICE BofA US High Yield Index Source Fidelity Investments Morningstar Bloomberg Barclays data as of 63020
-10
-5
0
5
10
15
20
25
Early Mid Late Recession
US Stocks IG Bonds Cash
Annualized Real ReturnAnnualized Nominal Return
75th
percentile
25th
percentile
Median
Asset Class Performance by Cycle Phase (1950ndash2018)
10-Year Portfolio Return Distribution by Cycle Phase Starting Point
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
ASSE
TM
ARKE
TS
-40
-30
-20
-10
0
10
20
30
40
Jun-
12
Sep-
12
Dec
-12
Mar
-13
Jun-
13
Sep-
13
Dec
-13
Mar
-14
Jun-
14
Sep-
14
Dec
-14
Mar
-15
Jun-
15
Sep-
15
Dec
-15
Mar
-16
Jun-
16
Sep-
16
Dec
-16
Mar
-17
Jun-
17
Sep-
17
Dec
-17
Mar
-18
Jun-
18
Sep-
18
Dec
-18
Mar
-19
Jun-
19
Sep-
19
Dec
-19
Mar
-20
Jun-
20
EM DM US
27Past performance is no guarantee of future results DM Developed Markets EM Emerging Markets EPS Earnings per share Forward EPS Next 12 months expectations Source MSCI Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Global EPS Growth (Trailing 12 Months)
Forward EPS
53
01-49
Percent
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
ASSE
TM
ARKE
TS
0
5
10
15
20
25
2005 2008 2011 2014 2017 2020
DM Trailing PE EM Trailing PE US Trailing PE Forward PE
28
DM Non-US Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Price-to-earnings ratio (PE) stock price divided by earnings per share Also known as the multiple PE gives investors an idea of how much they are paying for a companyrsquos earnings power Long-term average PE for Emerging Markets includes data for 1988ndash2017 for Non-US Developed Markets 1973ndash2016 for the United States 1926ndash2017 Indexes DMmdashMSCI EAFE Index EMmdashMSCI EM Index United StatesmdashSampP 500 Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
EM
US
DM
DM Long-Term Average
US Long-Term Average
EM Long-Term Average
Global Stock Market PE Ratios
Ratio
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
ASSE
TM
ARKE
TS
0
10
20
30
40
50
60
70
80
90
100
Rus
sia
Turk
eySp
ain
Sout
h Ko
rea
UK
Indo
nesi
aC
hina
Aust
ralia EM
Braz
ilIta
lyM
exic
oG
erm
any
Philip
pine
sD
MFr
ance
Can
ada
Japa
nIn
dia
US
-35
-30
-25
-20
-15
-10
-5
0
5
10
GBP JPY CAD EUR CNY
29
DM Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information LEFT Price-to-earnings (PE) ratio (or multiple) stock price divided by earnings per share which indicates how much investors are paying for a companyrsquos earnings power Cyclically adjusted earnings are 10-year averages adjusted for inflation Source FactSet countriesrsquo statistical organizations Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GBPmdashBritish pound JPYmdashJapanese yen CADmdashCanadian dollar EURmdasheuro CNYmdashChinese yuanSource Federal Reserve Board Haver Analytics Fidelity Investments (AART) as of 63020
53120 20-Year Range
Valuation of Real Exchange Rates
Expensive vs $
Cheap vs $
Shiller CAPE
Last 12-Month Range 63020
Cyclically Adjusted PEs Valuation of Major Currencies vs USD
Non-US Equity and Forex Valuations Relatively AttractiveCyclically adjusted PE (CAPE) ratios for international developed-market and emerging-market equities remained below US valuations providing a relatively favorable long-term backdrop for non-US stocks In Q2 the US dollar depreciated against many of the worldrsquos major currencies nevertheless US dollar valuations remain relatively expensive overall
ASSE
TM
ARKE
TS
LEFT TIPS Treasury Inflation-Protected Securities SOURCE Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Source CME Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 6302030
00
05
10
15
20
25
30
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
10 Year LT Average (Since 1998)
US Treasury Breakeven Inflation Rates
Yield
$0
$20
$40
$60
$80
$100
$120
$140
$160
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
WTI Crude Oil
Inflation Adjusted Price (March 2020 Dollars)
Real Oil Price
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
ASSE
TM
ARKE
TS
31
Past performance is no guarantee of future results Sectors as defined by GICS White line is a theoretical representation of the business cycle as it moves through early mid late and recession phases Green and red shaded portions above respectively represent over- or underperformance relative to the broader market unshaded (white) portions suggest no clear pattern of over- or underperformance Double +ndash signs indicate that the sector is showing a consistent signal across all three metrics full-phase average performance median monthly difference and cycle hit rate A single +ndash indicates a mixed or less consistent signal Return data from 1962 to 2016 Source Fidelity Investments (AART) as of 63020
Business-Cycle Approach to SectorsSector EARLY CYCLE
Economically sensitive sectors may tend to outperform while more defensive sectors have
tended to underperform
Making marginal portfolio allocation changes to manage
drawdown risk with sectorsmay enhance risk-adjusted
returns during this cycle
Defensive and inflation-resistantsectors tend to perform better
while more cyclical sectors underperform
Since performance is generally negative in
recessions investors should focus on the most defensive
historically stable sectors
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
ASSE
TM
ARKE
TS
400
420
440
460
480
500
520
540
092
094
096
098
100
102
104
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18D
ec-1
8M
ar-1
9Ju
n-19
Sep-
19D
ec-1
9M
ar-2
0Ju
n-20
Value vs Growth Performance CRB Raw Industrials Index
LEFT Gray bars represent US recessions as defined by NBER Asset classes represented by Value Fidelity Value ETF Growth Russell 1000reg
Growth Index Commodity Prices CRB Raw Industrials Index Source Federal Reserve Board NBER Haver Analytics Bloomberg Finance LP Fidelity Investments (AART) as of 63020 RIGHT Asset classes represented by Growth Russell 1000reg Growth Index Value Russell 1000reg Value Index Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020 Past performance is no guarantee of future results All indexes are unmanaged You cannot invest directly in an index Unlike mutual funds ETF shares are bought and sold at market price which may be higher or lower than their NAV and are not individually redeemed from the fund32
Value Equity More Attractive after Long UnderperformanceOn a cyclical basis the relative performance of value stocks has tended to correlate generally with the direction of the global economy and in particular with commodity prices which may be bottoming after the worldwide COVID-19 shutdown Meanwhile after a decade of trailing other leading factors and styles valuersquos relative valuations are at their most attractive in roughly 20 years
Price-to-Book Valuation SpreadsValue Relative Performance vs Commodity Prices
Ratio PB RatioIndex
0
1
2
3
4
5
6
7
8
9
10
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Growth vs Value
ASSE
TM
ARKE
TS
33
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Percentile ranks of yields and spreads based on historical period from 1993 to 2020 MBS mortgage-backed securities Source Bloomberg Barclays Bank of America Merrill Lynch JP Morgan Fidelity Investments (AART) as of 63020
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
ECO
NO
MY
050
075
100
125
150
175
200
225
250
275
ClevelandFed
AtlantaFed
New YorkFed
CoreCPI
May-2020 Dec-2019
LEFT CPI Consumer Price Index Core CPI excludes Food and Energy Cleveland Fed Cleveland 16 Trimmed Mean CPI Atlanta Fed StickyCPI New York Fed Underlying Inflation Gauge Source Federal Reserve Board Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GFC Global Financial Crisis Inflation curves derived from Inflation swaps Source Bloomberg Financial Fidelity Investments (AART) as of 6302018
Measures of US Inflation
Year-Over-Year
050
075
100
125
150
175
200
225
250
275
1 2 3 4 5 6 7 8 9 10 20 30Years
Expected CPI Year-Over-Year
US Inflation Expectations
June 2010
June 2020
GFC
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Federal Reserve Board NBER Bureau of Economic Analysis Haver Analytics Fidelity Investments (AART) as of 33120 RIGHT The 50 of households with the lowest incomes Source Federal Reserve Board Bureau of Economic Analysis World Inequality Data Haver Analytics Fidelity Investments (AART) as of 12311819
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
0
0
0
0
0
0
0
0
0
0
0
70
75
80
85
90
95
100
105
1993 1996 1999 2002 2005 2008 2011 2014 2017 2020
Non-Financial Corporate CreditRevenues
12
13
14
15
16
17
18
19
20
21
300
350
400
450
500
550
600
1976 1981 1986 1991 1996 2001 2006 2011 2016
Financial Assets Bottom 50 Household Income
Household Financial Assets and Income
Share of Household Income
US Corporate Debt
Ratio Share of Disposable Income
ECO
NO
MY
-$1000
$0
$1000
$2000
$3000
$4000
$5000
May
-201
1
Nov
-201
1
May
-201
2
Nov
-201
2
May
-201
3
Nov
-201
3
May
-201
4
Nov
-201
4
May
-201
5
Nov
-201
5
May
-201
6
Nov
-201
6
May
-201
7
Nov
-201
7
May
-201
8
Nov
-201
8
May
-201
9
Nov
-201
9
May
-202
0
UK Japan Eurozone US Total
20
Billions (12-Month Change)
QE Quantitative Easing Source Federal Reserve Bank of Japan European Central Bank Bank of England Haver Analytics Fidelity Investments (AART) as of 53120
Central Bank Balance Sheets
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
ECO
NO
MY
-20
-15
-10
-5
0
5
10
-100
-075
-050
-025
000
025
050
075
100
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
State and Local Government Federal Government Federal Budget Deficit
Source CBO BEA Haver Analytics 2020 and 2021 Budget Deficits are CBO projections (httpswwwcbogovsystemfiles2020-0456344-CBO-presentationpdf ) Fidelity Investments (AART) 21
Percent of GDP
US Federal Fiscal Deficit and Government Impact on GDP
Contribution to GDP
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
ECO
NO
MY
22 Ag Agriculture FDI Foreign direct investment ADR American depositary receipt Source Fidelity Investments (AART) as of 63020
US-China Relationship
Geopolitical Rivalry
Trade
Industrial Policy Issuesbull IT sectorbull Health carebull Supply chains
Strategic Competition
Policy Tools of De-Globalization
Military Hegemony
in Asia
Economic Advantage in
Key Areas
Consumer and Other
Goods
Bilateral Flashpointsbull Hong Kongbull Detention campsbull Taiwanbull South China Sea
Policy Action Categories Example
TariffTrade Barriers Raise tariffs to reduce imports
Export and FDI Restrictions Curtail high-tech exports
Industrial Policies Mandate supply chainonshoring
ImmigrationHuman Mobility Tighter borders
Financial Restrictions Penalties
US sanctions tax policies
InfoData Restrictions Chinas firewall
Portfolio Investment Restrictions
US de-lists Chinese ADRs
Politicized Debt Action Selective US default
BroadEconomic
Investment
TariffsMarket Accessbull Phase 1 ag deal
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
ECO
NO
MY
Risks
23
Business Cycle
Asset Allocation Implications
US is in process of emerging from a brief but sharp recession
Policymakers providing abundant support to markets and economy
Emphasize focus on diversified anddisciplined investment strategies
Members hold a wide range of views but see opportunities within asset classes
Opportunities include non-US assets US small cap and value equities TIPS and gold
For illustrative purposes only Diversification does not ensure a profit or guarantee against a loss Source Fidelity Investments (AART) as of 63020
The recovery remains highly uncertain given the size and exogenous nature of
the COVID shock
Policy actions are playing a larger role in driving financial market performance than
in past cycles
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
ASSE
TM
ARKE
TS
EM Emerging Markets EMEA Europe the Middle East and Africa For indexes and other important information used to represent above asset categories see Appendix Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged Sector returns represented by SampP 500 sectors Sector investing involves risk Because of its narrow focus sector investing may be more volatile than investing in more diversified baskets of securities Source Bloomberg Finance LP Fidelity Investments (AART) as of 6302025
US Equity Styles Total ReturnInternational Equities and Global Assets Total Return
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
For illustrative purposes only Past performance is no guarantee of future results Diversification does not ensure a profit or guarantee against a loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Fidelity proprietary analysis based on Monte Carlo simulations using historical index returns Domestic Equity Dow Jones US Total Stock Market Index Foreign Equity MSCI ACWI ex USA Index Investment Grade (IG) Bonds Bloomberg Barclays US Aggregate Bond Index High Yield (HY) Bonds ICE BofA US High Yield Index Source Fidelity Investments Morningstar Bloomberg Barclays data as of 63020
-10
-5
0
5
10
15
20
25
Early Mid Late Recession
US Stocks IG Bonds Cash
Annualized Real ReturnAnnualized Nominal Return
75th
percentile
25th
percentile
Median
Asset Class Performance by Cycle Phase (1950ndash2018)
10-Year Portfolio Return Distribution by Cycle Phase Starting Point
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
ASSE
TM
ARKE
TS
-40
-30
-20
-10
0
10
20
30
40
Jun-
12
Sep-
12
Dec
-12
Mar
-13
Jun-
13
Sep-
13
Dec
-13
Mar
-14
Jun-
14
Sep-
14
Dec
-14
Mar
-15
Jun-
15
Sep-
15
Dec
-15
Mar
-16
Jun-
16
Sep-
16
Dec
-16
Mar
-17
Jun-
17
Sep-
17
Dec
-17
Mar
-18
Jun-
18
Sep-
18
Dec
-18
Mar
-19
Jun-
19
Sep-
19
Dec
-19
Mar
-20
Jun-
20
EM DM US
27Past performance is no guarantee of future results DM Developed Markets EM Emerging Markets EPS Earnings per share Forward EPS Next 12 months expectations Source MSCI Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Global EPS Growth (Trailing 12 Months)
Forward EPS
53
01-49
Percent
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
ASSE
TM
ARKE
TS
0
5
10
15
20
25
2005 2008 2011 2014 2017 2020
DM Trailing PE EM Trailing PE US Trailing PE Forward PE
28
DM Non-US Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Price-to-earnings ratio (PE) stock price divided by earnings per share Also known as the multiple PE gives investors an idea of how much they are paying for a companyrsquos earnings power Long-term average PE for Emerging Markets includes data for 1988ndash2017 for Non-US Developed Markets 1973ndash2016 for the United States 1926ndash2017 Indexes DMmdashMSCI EAFE Index EMmdashMSCI EM Index United StatesmdashSampP 500 Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
EM
US
DM
DM Long-Term Average
US Long-Term Average
EM Long-Term Average
Global Stock Market PE Ratios
Ratio
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
ASSE
TM
ARKE
TS
0
10
20
30
40
50
60
70
80
90
100
Rus
sia
Turk
eySp
ain
Sout
h Ko
rea
UK
Indo
nesi
aC
hina
Aust
ralia EM
Braz
ilIta
lyM
exic
oG
erm
any
Philip
pine
sD
MFr
ance
Can
ada
Japa
nIn
dia
US
-35
-30
-25
-20
-15
-10
-5
0
5
10
GBP JPY CAD EUR CNY
29
DM Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information LEFT Price-to-earnings (PE) ratio (or multiple) stock price divided by earnings per share which indicates how much investors are paying for a companyrsquos earnings power Cyclically adjusted earnings are 10-year averages adjusted for inflation Source FactSet countriesrsquo statistical organizations Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GBPmdashBritish pound JPYmdashJapanese yen CADmdashCanadian dollar EURmdasheuro CNYmdashChinese yuanSource Federal Reserve Board Haver Analytics Fidelity Investments (AART) as of 63020
53120 20-Year Range
Valuation of Real Exchange Rates
Expensive vs $
Cheap vs $
Shiller CAPE
Last 12-Month Range 63020
Cyclically Adjusted PEs Valuation of Major Currencies vs USD
Non-US Equity and Forex Valuations Relatively AttractiveCyclically adjusted PE (CAPE) ratios for international developed-market and emerging-market equities remained below US valuations providing a relatively favorable long-term backdrop for non-US stocks In Q2 the US dollar depreciated against many of the worldrsquos major currencies nevertheless US dollar valuations remain relatively expensive overall
ASSE
TM
ARKE
TS
LEFT TIPS Treasury Inflation-Protected Securities SOURCE Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Source CME Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 6302030
00
05
10
15
20
25
30
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
10 Year LT Average (Since 1998)
US Treasury Breakeven Inflation Rates
Yield
$0
$20
$40
$60
$80
$100
$120
$140
$160
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
WTI Crude Oil
Inflation Adjusted Price (March 2020 Dollars)
Real Oil Price
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
ASSE
TM
ARKE
TS
31
Past performance is no guarantee of future results Sectors as defined by GICS White line is a theoretical representation of the business cycle as it moves through early mid late and recession phases Green and red shaded portions above respectively represent over- or underperformance relative to the broader market unshaded (white) portions suggest no clear pattern of over- or underperformance Double +ndash signs indicate that the sector is showing a consistent signal across all three metrics full-phase average performance median monthly difference and cycle hit rate A single +ndash indicates a mixed or less consistent signal Return data from 1962 to 2016 Source Fidelity Investments (AART) as of 63020
Business-Cycle Approach to SectorsSector EARLY CYCLE
Economically sensitive sectors may tend to outperform while more defensive sectors have
tended to underperform
Making marginal portfolio allocation changes to manage
drawdown risk with sectorsmay enhance risk-adjusted
returns during this cycle
Defensive and inflation-resistantsectors tend to perform better
while more cyclical sectors underperform
Since performance is generally negative in
recessions investors should focus on the most defensive
historically stable sectors
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
ASSE
TM
ARKE
TS
400
420
440
460
480
500
520
540
092
094
096
098
100
102
104
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18D
ec-1
8M
ar-1
9Ju
n-19
Sep-
19D
ec-1
9M
ar-2
0Ju
n-20
Value vs Growth Performance CRB Raw Industrials Index
LEFT Gray bars represent US recessions as defined by NBER Asset classes represented by Value Fidelity Value ETF Growth Russell 1000reg
Growth Index Commodity Prices CRB Raw Industrials Index Source Federal Reserve Board NBER Haver Analytics Bloomberg Finance LP Fidelity Investments (AART) as of 63020 RIGHT Asset classes represented by Growth Russell 1000reg Growth Index Value Russell 1000reg Value Index Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020 Past performance is no guarantee of future results All indexes are unmanaged You cannot invest directly in an index Unlike mutual funds ETF shares are bought and sold at market price which may be higher or lower than their NAV and are not individually redeemed from the fund32
Value Equity More Attractive after Long UnderperformanceOn a cyclical basis the relative performance of value stocks has tended to correlate generally with the direction of the global economy and in particular with commodity prices which may be bottoming after the worldwide COVID-19 shutdown Meanwhile after a decade of trailing other leading factors and styles valuersquos relative valuations are at their most attractive in roughly 20 years
Price-to-Book Valuation SpreadsValue Relative Performance vs Commodity Prices
Ratio PB RatioIndex
0
1
2
3
4
5
6
7
8
9
10
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Growth vs Value
ASSE
TM
ARKE
TS
33
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Percentile ranks of yields and spreads based on historical period from 1993 to 2020 MBS mortgage-backed securities Source Bloomberg Barclays Bank of America Merrill Lynch JP Morgan Fidelity Investments (AART) as of 63020
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
ECO
NO
MY
LEFT Gray bars represent US recessions as defined by NBER Source Federal Reserve Board NBER Bureau of Economic Analysis Haver Analytics Fidelity Investments (AART) as of 33120 RIGHT The 50 of households with the lowest incomes Source Federal Reserve Board Bureau of Economic Analysis World Inequality Data Haver Analytics Fidelity Investments (AART) as of 12311819
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
0
0
0
0
0
0
0
0
0
0
0
70
75
80
85
90
95
100
105
1993 1996 1999 2002 2005 2008 2011 2014 2017 2020
Non-Financial Corporate CreditRevenues
12
13
14
15
16
17
18
19
20
21
300
350
400
450
500
550
600
1976 1981 1986 1991 1996 2001 2006 2011 2016
Financial Assets Bottom 50 Household Income
Household Financial Assets and Income
Share of Household Income
US Corporate Debt
Ratio Share of Disposable Income
ECO
NO
MY
-$1000
$0
$1000
$2000
$3000
$4000
$5000
May
-201
1
Nov
-201
1
May
-201
2
Nov
-201
2
May
-201
3
Nov
-201
3
May
-201
4
Nov
-201
4
May
-201
5
Nov
-201
5
May
-201
6
Nov
-201
6
May
-201
7
Nov
-201
7
May
-201
8
Nov
-201
8
May
-201
9
Nov
-201
9
May
-202
0
UK Japan Eurozone US Total
20
Billions (12-Month Change)
QE Quantitative Easing Source Federal Reserve Bank of Japan European Central Bank Bank of England Haver Analytics Fidelity Investments (AART) as of 53120
Central Bank Balance Sheets
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
ECO
NO
MY
-20
-15
-10
-5
0
5
10
-100
-075
-050
-025
000
025
050
075
100
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
State and Local Government Federal Government Federal Budget Deficit
Source CBO BEA Haver Analytics 2020 and 2021 Budget Deficits are CBO projections (httpswwwcbogovsystemfiles2020-0456344-CBO-presentationpdf ) Fidelity Investments (AART) 21
Percent of GDP
US Federal Fiscal Deficit and Government Impact on GDP
Contribution to GDP
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
ECO
NO
MY
22 Ag Agriculture FDI Foreign direct investment ADR American depositary receipt Source Fidelity Investments (AART) as of 63020
US-China Relationship
Geopolitical Rivalry
Trade
Industrial Policy Issuesbull IT sectorbull Health carebull Supply chains
Strategic Competition
Policy Tools of De-Globalization
Military Hegemony
in Asia
Economic Advantage in
Key Areas
Consumer and Other
Goods
Bilateral Flashpointsbull Hong Kongbull Detention campsbull Taiwanbull South China Sea
Policy Action Categories Example
TariffTrade Barriers Raise tariffs to reduce imports
Export and FDI Restrictions Curtail high-tech exports
Industrial Policies Mandate supply chainonshoring
ImmigrationHuman Mobility Tighter borders
Financial Restrictions Penalties
US sanctions tax policies
InfoData Restrictions Chinas firewall
Portfolio Investment Restrictions
US de-lists Chinese ADRs
Politicized Debt Action Selective US default
BroadEconomic
Investment
TariffsMarket Accessbull Phase 1 ag deal
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
ECO
NO
MY
Risks
23
Business Cycle
Asset Allocation Implications
US is in process of emerging from a brief but sharp recession
Policymakers providing abundant support to markets and economy
Emphasize focus on diversified anddisciplined investment strategies
Members hold a wide range of views but see opportunities within asset classes
Opportunities include non-US assets US small cap and value equities TIPS and gold
For illustrative purposes only Diversification does not ensure a profit or guarantee against a loss Source Fidelity Investments (AART) as of 63020
The recovery remains highly uncertain given the size and exogenous nature of
the COVID shock
Policy actions are playing a larger role in driving financial market performance than
in past cycles
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
ASSE
TM
ARKE
TS
EM Emerging Markets EMEA Europe the Middle East and Africa For indexes and other important information used to represent above asset categories see Appendix Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged Sector returns represented by SampP 500 sectors Sector investing involves risk Because of its narrow focus sector investing may be more volatile than investing in more diversified baskets of securities Source Bloomberg Finance LP Fidelity Investments (AART) as of 6302025
US Equity Styles Total ReturnInternational Equities and Global Assets Total Return
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
For illustrative purposes only Past performance is no guarantee of future results Diversification does not ensure a profit or guarantee against a loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Fidelity proprietary analysis based on Monte Carlo simulations using historical index returns Domestic Equity Dow Jones US Total Stock Market Index Foreign Equity MSCI ACWI ex USA Index Investment Grade (IG) Bonds Bloomberg Barclays US Aggregate Bond Index High Yield (HY) Bonds ICE BofA US High Yield Index Source Fidelity Investments Morningstar Bloomberg Barclays data as of 63020
-10
-5
0
5
10
15
20
25
Early Mid Late Recession
US Stocks IG Bonds Cash
Annualized Real ReturnAnnualized Nominal Return
75th
percentile
25th
percentile
Median
Asset Class Performance by Cycle Phase (1950ndash2018)
10-Year Portfolio Return Distribution by Cycle Phase Starting Point
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
ASSE
TM
ARKE
TS
-40
-30
-20
-10
0
10
20
30
40
Jun-
12
Sep-
12
Dec
-12
Mar
-13
Jun-
13
Sep-
13
Dec
-13
Mar
-14
Jun-
14
Sep-
14
Dec
-14
Mar
-15
Jun-
15
Sep-
15
Dec
-15
Mar
-16
Jun-
16
Sep-
16
Dec
-16
Mar
-17
Jun-
17
Sep-
17
Dec
-17
Mar
-18
Jun-
18
Sep-
18
Dec
-18
Mar
-19
Jun-
19
Sep-
19
Dec
-19
Mar
-20
Jun-
20
EM DM US
27Past performance is no guarantee of future results DM Developed Markets EM Emerging Markets EPS Earnings per share Forward EPS Next 12 months expectations Source MSCI Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Global EPS Growth (Trailing 12 Months)
Forward EPS
53
01-49
Percent
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
ASSE
TM
ARKE
TS
0
5
10
15
20
25
2005 2008 2011 2014 2017 2020
DM Trailing PE EM Trailing PE US Trailing PE Forward PE
28
DM Non-US Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Price-to-earnings ratio (PE) stock price divided by earnings per share Also known as the multiple PE gives investors an idea of how much they are paying for a companyrsquos earnings power Long-term average PE for Emerging Markets includes data for 1988ndash2017 for Non-US Developed Markets 1973ndash2016 for the United States 1926ndash2017 Indexes DMmdashMSCI EAFE Index EMmdashMSCI EM Index United StatesmdashSampP 500 Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
EM
US
DM
DM Long-Term Average
US Long-Term Average
EM Long-Term Average
Global Stock Market PE Ratios
Ratio
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
ASSE
TM
ARKE
TS
0
10
20
30
40
50
60
70
80
90
100
Rus
sia
Turk
eySp
ain
Sout
h Ko
rea
UK
Indo
nesi
aC
hina
Aust
ralia EM
Braz
ilIta
lyM
exic
oG
erm
any
Philip
pine
sD
MFr
ance
Can
ada
Japa
nIn
dia
US
-35
-30
-25
-20
-15
-10
-5
0
5
10
GBP JPY CAD EUR CNY
29
DM Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information LEFT Price-to-earnings (PE) ratio (or multiple) stock price divided by earnings per share which indicates how much investors are paying for a companyrsquos earnings power Cyclically adjusted earnings are 10-year averages adjusted for inflation Source FactSet countriesrsquo statistical organizations Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GBPmdashBritish pound JPYmdashJapanese yen CADmdashCanadian dollar EURmdasheuro CNYmdashChinese yuanSource Federal Reserve Board Haver Analytics Fidelity Investments (AART) as of 63020
53120 20-Year Range
Valuation of Real Exchange Rates
Expensive vs $
Cheap vs $
Shiller CAPE
Last 12-Month Range 63020
Cyclically Adjusted PEs Valuation of Major Currencies vs USD
Non-US Equity and Forex Valuations Relatively AttractiveCyclically adjusted PE (CAPE) ratios for international developed-market and emerging-market equities remained below US valuations providing a relatively favorable long-term backdrop for non-US stocks In Q2 the US dollar depreciated against many of the worldrsquos major currencies nevertheless US dollar valuations remain relatively expensive overall
ASSE
TM
ARKE
TS
LEFT TIPS Treasury Inflation-Protected Securities SOURCE Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Source CME Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 6302030
00
05
10
15
20
25
30
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
10 Year LT Average (Since 1998)
US Treasury Breakeven Inflation Rates
Yield
$0
$20
$40
$60
$80
$100
$120
$140
$160
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
WTI Crude Oil
Inflation Adjusted Price (March 2020 Dollars)
Real Oil Price
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
ASSE
TM
ARKE
TS
31
Past performance is no guarantee of future results Sectors as defined by GICS White line is a theoretical representation of the business cycle as it moves through early mid late and recession phases Green and red shaded portions above respectively represent over- or underperformance relative to the broader market unshaded (white) portions suggest no clear pattern of over- or underperformance Double +ndash signs indicate that the sector is showing a consistent signal across all three metrics full-phase average performance median monthly difference and cycle hit rate A single +ndash indicates a mixed or less consistent signal Return data from 1962 to 2016 Source Fidelity Investments (AART) as of 63020
Business-Cycle Approach to SectorsSector EARLY CYCLE
Economically sensitive sectors may tend to outperform while more defensive sectors have
tended to underperform
Making marginal portfolio allocation changes to manage
drawdown risk with sectorsmay enhance risk-adjusted
returns during this cycle
Defensive and inflation-resistantsectors tend to perform better
while more cyclical sectors underperform
Since performance is generally negative in
recessions investors should focus on the most defensive
historically stable sectors
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
ASSE
TM
ARKE
TS
400
420
440
460
480
500
520
540
092
094
096
098
100
102
104
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18D
ec-1
8M
ar-1
9Ju
n-19
Sep-
19D
ec-1
9M
ar-2
0Ju
n-20
Value vs Growth Performance CRB Raw Industrials Index
LEFT Gray bars represent US recessions as defined by NBER Asset classes represented by Value Fidelity Value ETF Growth Russell 1000reg
Growth Index Commodity Prices CRB Raw Industrials Index Source Federal Reserve Board NBER Haver Analytics Bloomberg Finance LP Fidelity Investments (AART) as of 63020 RIGHT Asset classes represented by Growth Russell 1000reg Growth Index Value Russell 1000reg Value Index Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020 Past performance is no guarantee of future results All indexes are unmanaged You cannot invest directly in an index Unlike mutual funds ETF shares are bought and sold at market price which may be higher or lower than their NAV and are not individually redeemed from the fund32
Value Equity More Attractive after Long UnderperformanceOn a cyclical basis the relative performance of value stocks has tended to correlate generally with the direction of the global economy and in particular with commodity prices which may be bottoming after the worldwide COVID-19 shutdown Meanwhile after a decade of trailing other leading factors and styles valuersquos relative valuations are at their most attractive in roughly 20 years
Price-to-Book Valuation SpreadsValue Relative Performance vs Commodity Prices
Ratio PB RatioIndex
0
1
2
3
4
5
6
7
8
9
10
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Growth vs Value
ASSE
TM
ARKE
TS
33
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Percentile ranks of yields and spreads based on historical period from 1993 to 2020 MBS mortgage-backed securities Source Bloomberg Barclays Bank of America Merrill Lynch JP Morgan Fidelity Investments (AART) as of 63020
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
ECO
NO
MY
-$1000
$0
$1000
$2000
$3000
$4000
$5000
May
-201
1
Nov
-201
1
May
-201
2
Nov
-201
2
May
-201
3
Nov
-201
3
May
-201
4
Nov
-201
4
May
-201
5
Nov
-201
5
May
-201
6
Nov
-201
6
May
-201
7
Nov
-201
7
May
-201
8
Nov
-201
8
May
-201
9
Nov
-201
9
May
-202
0
UK Japan Eurozone US Total
20
Billions (12-Month Change)
QE Quantitative Easing Source Federal Reserve Bank of Japan European Central Bank Bank of England Haver Analytics Fidelity Investments (AART) as of 53120
Central Bank Balance Sheets
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
ECO
NO
MY
-20
-15
-10
-5
0
5
10
-100
-075
-050
-025
000
025
050
075
100
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
State and Local Government Federal Government Federal Budget Deficit
Source CBO BEA Haver Analytics 2020 and 2021 Budget Deficits are CBO projections (httpswwwcbogovsystemfiles2020-0456344-CBO-presentationpdf ) Fidelity Investments (AART) 21
Percent of GDP
US Federal Fiscal Deficit and Government Impact on GDP
Contribution to GDP
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
ECO
NO
MY
22 Ag Agriculture FDI Foreign direct investment ADR American depositary receipt Source Fidelity Investments (AART) as of 63020
US-China Relationship
Geopolitical Rivalry
Trade
Industrial Policy Issuesbull IT sectorbull Health carebull Supply chains
Strategic Competition
Policy Tools of De-Globalization
Military Hegemony
in Asia
Economic Advantage in
Key Areas
Consumer and Other
Goods
Bilateral Flashpointsbull Hong Kongbull Detention campsbull Taiwanbull South China Sea
Policy Action Categories Example
TariffTrade Barriers Raise tariffs to reduce imports
Export and FDI Restrictions Curtail high-tech exports
Industrial Policies Mandate supply chainonshoring
ImmigrationHuman Mobility Tighter borders
Financial Restrictions Penalties
US sanctions tax policies
InfoData Restrictions Chinas firewall
Portfolio Investment Restrictions
US de-lists Chinese ADRs
Politicized Debt Action Selective US default
BroadEconomic
Investment
TariffsMarket Accessbull Phase 1 ag deal
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
ECO
NO
MY
Risks
23
Business Cycle
Asset Allocation Implications
US is in process of emerging from a brief but sharp recession
Policymakers providing abundant support to markets and economy
Emphasize focus on diversified anddisciplined investment strategies
Members hold a wide range of views but see opportunities within asset classes
Opportunities include non-US assets US small cap and value equities TIPS and gold
For illustrative purposes only Diversification does not ensure a profit or guarantee against a loss Source Fidelity Investments (AART) as of 63020
The recovery remains highly uncertain given the size and exogenous nature of
the COVID shock
Policy actions are playing a larger role in driving financial market performance than
in past cycles
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
ASSE
TM
ARKE
TS
EM Emerging Markets EMEA Europe the Middle East and Africa For indexes and other important information used to represent above asset categories see Appendix Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged Sector returns represented by SampP 500 sectors Sector investing involves risk Because of its narrow focus sector investing may be more volatile than investing in more diversified baskets of securities Source Bloomberg Finance LP Fidelity Investments (AART) as of 6302025
US Equity Styles Total ReturnInternational Equities and Global Assets Total Return
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
For illustrative purposes only Past performance is no guarantee of future results Diversification does not ensure a profit or guarantee against a loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Fidelity proprietary analysis based on Monte Carlo simulations using historical index returns Domestic Equity Dow Jones US Total Stock Market Index Foreign Equity MSCI ACWI ex USA Index Investment Grade (IG) Bonds Bloomberg Barclays US Aggregate Bond Index High Yield (HY) Bonds ICE BofA US High Yield Index Source Fidelity Investments Morningstar Bloomberg Barclays data as of 63020
-10
-5
0
5
10
15
20
25
Early Mid Late Recession
US Stocks IG Bonds Cash
Annualized Real ReturnAnnualized Nominal Return
75th
percentile
25th
percentile
Median
Asset Class Performance by Cycle Phase (1950ndash2018)
10-Year Portfolio Return Distribution by Cycle Phase Starting Point
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
ASSE
TM
ARKE
TS
-40
-30
-20
-10
0
10
20
30
40
Jun-
12
Sep-
12
Dec
-12
Mar
-13
Jun-
13
Sep-
13
Dec
-13
Mar
-14
Jun-
14
Sep-
14
Dec
-14
Mar
-15
Jun-
15
Sep-
15
Dec
-15
Mar
-16
Jun-
16
Sep-
16
Dec
-16
Mar
-17
Jun-
17
Sep-
17
Dec
-17
Mar
-18
Jun-
18
Sep-
18
Dec
-18
Mar
-19
Jun-
19
Sep-
19
Dec
-19
Mar
-20
Jun-
20
EM DM US
27Past performance is no guarantee of future results DM Developed Markets EM Emerging Markets EPS Earnings per share Forward EPS Next 12 months expectations Source MSCI Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Global EPS Growth (Trailing 12 Months)
Forward EPS
53
01-49
Percent
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
ASSE
TM
ARKE
TS
0
5
10
15
20
25
2005 2008 2011 2014 2017 2020
DM Trailing PE EM Trailing PE US Trailing PE Forward PE
28
DM Non-US Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Price-to-earnings ratio (PE) stock price divided by earnings per share Also known as the multiple PE gives investors an idea of how much they are paying for a companyrsquos earnings power Long-term average PE for Emerging Markets includes data for 1988ndash2017 for Non-US Developed Markets 1973ndash2016 for the United States 1926ndash2017 Indexes DMmdashMSCI EAFE Index EMmdashMSCI EM Index United StatesmdashSampP 500 Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
EM
US
DM
DM Long-Term Average
US Long-Term Average
EM Long-Term Average
Global Stock Market PE Ratios
Ratio
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
ASSE
TM
ARKE
TS
0
10
20
30
40
50
60
70
80
90
100
Rus
sia
Turk
eySp
ain
Sout
h Ko
rea
UK
Indo
nesi
aC
hina
Aust
ralia EM
Braz
ilIta
lyM
exic
oG
erm
any
Philip
pine
sD
MFr
ance
Can
ada
Japa
nIn
dia
US
-35
-30
-25
-20
-15
-10
-5
0
5
10
GBP JPY CAD EUR CNY
29
DM Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information LEFT Price-to-earnings (PE) ratio (or multiple) stock price divided by earnings per share which indicates how much investors are paying for a companyrsquos earnings power Cyclically adjusted earnings are 10-year averages adjusted for inflation Source FactSet countriesrsquo statistical organizations Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GBPmdashBritish pound JPYmdashJapanese yen CADmdashCanadian dollar EURmdasheuro CNYmdashChinese yuanSource Federal Reserve Board Haver Analytics Fidelity Investments (AART) as of 63020
53120 20-Year Range
Valuation of Real Exchange Rates
Expensive vs $
Cheap vs $
Shiller CAPE
Last 12-Month Range 63020
Cyclically Adjusted PEs Valuation of Major Currencies vs USD
Non-US Equity and Forex Valuations Relatively AttractiveCyclically adjusted PE (CAPE) ratios for international developed-market and emerging-market equities remained below US valuations providing a relatively favorable long-term backdrop for non-US stocks In Q2 the US dollar depreciated against many of the worldrsquos major currencies nevertheless US dollar valuations remain relatively expensive overall
ASSE
TM
ARKE
TS
LEFT TIPS Treasury Inflation-Protected Securities SOURCE Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Source CME Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 6302030
00
05
10
15
20
25
30
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
10 Year LT Average (Since 1998)
US Treasury Breakeven Inflation Rates
Yield
$0
$20
$40
$60
$80
$100
$120
$140
$160
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
WTI Crude Oil
Inflation Adjusted Price (March 2020 Dollars)
Real Oil Price
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
ASSE
TM
ARKE
TS
31
Past performance is no guarantee of future results Sectors as defined by GICS White line is a theoretical representation of the business cycle as it moves through early mid late and recession phases Green and red shaded portions above respectively represent over- or underperformance relative to the broader market unshaded (white) portions suggest no clear pattern of over- or underperformance Double +ndash signs indicate that the sector is showing a consistent signal across all three metrics full-phase average performance median monthly difference and cycle hit rate A single +ndash indicates a mixed or less consistent signal Return data from 1962 to 2016 Source Fidelity Investments (AART) as of 63020
Business-Cycle Approach to SectorsSector EARLY CYCLE
Economically sensitive sectors may tend to outperform while more defensive sectors have
tended to underperform
Making marginal portfolio allocation changes to manage
drawdown risk with sectorsmay enhance risk-adjusted
returns during this cycle
Defensive and inflation-resistantsectors tend to perform better
while more cyclical sectors underperform
Since performance is generally negative in
recessions investors should focus on the most defensive
historically stable sectors
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
ASSE
TM
ARKE
TS
400
420
440
460
480
500
520
540
092
094
096
098
100
102
104
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18D
ec-1
8M
ar-1
9Ju
n-19
Sep-
19D
ec-1
9M
ar-2
0Ju
n-20
Value vs Growth Performance CRB Raw Industrials Index
LEFT Gray bars represent US recessions as defined by NBER Asset classes represented by Value Fidelity Value ETF Growth Russell 1000reg
Growth Index Commodity Prices CRB Raw Industrials Index Source Federal Reserve Board NBER Haver Analytics Bloomberg Finance LP Fidelity Investments (AART) as of 63020 RIGHT Asset classes represented by Growth Russell 1000reg Growth Index Value Russell 1000reg Value Index Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020 Past performance is no guarantee of future results All indexes are unmanaged You cannot invest directly in an index Unlike mutual funds ETF shares are bought and sold at market price which may be higher or lower than their NAV and are not individually redeemed from the fund32
Value Equity More Attractive after Long UnderperformanceOn a cyclical basis the relative performance of value stocks has tended to correlate generally with the direction of the global economy and in particular with commodity prices which may be bottoming after the worldwide COVID-19 shutdown Meanwhile after a decade of trailing other leading factors and styles valuersquos relative valuations are at their most attractive in roughly 20 years
Price-to-Book Valuation SpreadsValue Relative Performance vs Commodity Prices
Ratio PB RatioIndex
0
1
2
3
4
5
6
7
8
9
10
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Growth vs Value
ASSE
TM
ARKE
TS
33
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Percentile ranks of yields and spreads based on historical period from 1993 to 2020 MBS mortgage-backed securities Source Bloomberg Barclays Bank of America Merrill Lynch JP Morgan Fidelity Investments (AART) as of 63020
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
ECO
NO
MY
-20
-15
-10
-5
0
5
10
-100
-075
-050
-025
000
025
050
075
100
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
State and Local Government Federal Government Federal Budget Deficit
Source CBO BEA Haver Analytics 2020 and 2021 Budget Deficits are CBO projections (httpswwwcbogovsystemfiles2020-0456344-CBO-presentationpdf ) Fidelity Investments (AART) 21
Percent of GDP
US Federal Fiscal Deficit and Government Impact on GDP
Contribution to GDP
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
ECO
NO
MY
22 Ag Agriculture FDI Foreign direct investment ADR American depositary receipt Source Fidelity Investments (AART) as of 63020
US-China Relationship
Geopolitical Rivalry
Trade
Industrial Policy Issuesbull IT sectorbull Health carebull Supply chains
Strategic Competition
Policy Tools of De-Globalization
Military Hegemony
in Asia
Economic Advantage in
Key Areas
Consumer and Other
Goods
Bilateral Flashpointsbull Hong Kongbull Detention campsbull Taiwanbull South China Sea
Policy Action Categories Example
TariffTrade Barriers Raise tariffs to reduce imports
Export and FDI Restrictions Curtail high-tech exports
Industrial Policies Mandate supply chainonshoring
ImmigrationHuman Mobility Tighter borders
Financial Restrictions Penalties
US sanctions tax policies
InfoData Restrictions Chinas firewall
Portfolio Investment Restrictions
US de-lists Chinese ADRs
Politicized Debt Action Selective US default
BroadEconomic
Investment
TariffsMarket Accessbull Phase 1 ag deal
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
ECO
NO
MY
Risks
23
Business Cycle
Asset Allocation Implications
US is in process of emerging from a brief but sharp recession
Policymakers providing abundant support to markets and economy
Emphasize focus on diversified anddisciplined investment strategies
Members hold a wide range of views but see opportunities within asset classes
Opportunities include non-US assets US small cap and value equities TIPS and gold
For illustrative purposes only Diversification does not ensure a profit or guarantee against a loss Source Fidelity Investments (AART) as of 63020
The recovery remains highly uncertain given the size and exogenous nature of
the COVID shock
Policy actions are playing a larger role in driving financial market performance than
in past cycles
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
ASSE
TM
ARKE
TS
EM Emerging Markets EMEA Europe the Middle East and Africa For indexes and other important information used to represent above asset categories see Appendix Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged Sector returns represented by SampP 500 sectors Sector investing involves risk Because of its narrow focus sector investing may be more volatile than investing in more diversified baskets of securities Source Bloomberg Finance LP Fidelity Investments (AART) as of 6302025
US Equity Styles Total ReturnInternational Equities and Global Assets Total Return
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
For illustrative purposes only Past performance is no guarantee of future results Diversification does not ensure a profit or guarantee against a loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Fidelity proprietary analysis based on Monte Carlo simulations using historical index returns Domestic Equity Dow Jones US Total Stock Market Index Foreign Equity MSCI ACWI ex USA Index Investment Grade (IG) Bonds Bloomberg Barclays US Aggregate Bond Index High Yield (HY) Bonds ICE BofA US High Yield Index Source Fidelity Investments Morningstar Bloomberg Barclays data as of 63020
-10
-5
0
5
10
15
20
25
Early Mid Late Recession
US Stocks IG Bonds Cash
Annualized Real ReturnAnnualized Nominal Return
75th
percentile
25th
percentile
Median
Asset Class Performance by Cycle Phase (1950ndash2018)
10-Year Portfolio Return Distribution by Cycle Phase Starting Point
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
ASSE
TM
ARKE
TS
-40
-30
-20
-10
0
10
20
30
40
Jun-
12
Sep-
12
Dec
-12
Mar
-13
Jun-
13
Sep-
13
Dec
-13
Mar
-14
Jun-
14
Sep-
14
Dec
-14
Mar
-15
Jun-
15
Sep-
15
Dec
-15
Mar
-16
Jun-
16
Sep-
16
Dec
-16
Mar
-17
Jun-
17
Sep-
17
Dec
-17
Mar
-18
Jun-
18
Sep-
18
Dec
-18
Mar
-19
Jun-
19
Sep-
19
Dec
-19
Mar
-20
Jun-
20
EM DM US
27Past performance is no guarantee of future results DM Developed Markets EM Emerging Markets EPS Earnings per share Forward EPS Next 12 months expectations Source MSCI Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Global EPS Growth (Trailing 12 Months)
Forward EPS
53
01-49
Percent
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
ASSE
TM
ARKE
TS
0
5
10
15
20
25
2005 2008 2011 2014 2017 2020
DM Trailing PE EM Trailing PE US Trailing PE Forward PE
28
DM Non-US Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Price-to-earnings ratio (PE) stock price divided by earnings per share Also known as the multiple PE gives investors an idea of how much they are paying for a companyrsquos earnings power Long-term average PE for Emerging Markets includes data for 1988ndash2017 for Non-US Developed Markets 1973ndash2016 for the United States 1926ndash2017 Indexes DMmdashMSCI EAFE Index EMmdashMSCI EM Index United StatesmdashSampP 500 Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
EM
US
DM
DM Long-Term Average
US Long-Term Average
EM Long-Term Average
Global Stock Market PE Ratios
Ratio
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
ASSE
TM
ARKE
TS
0
10
20
30
40
50
60
70
80
90
100
Rus
sia
Turk
eySp
ain
Sout
h Ko
rea
UK
Indo
nesi
aC
hina
Aust
ralia EM
Braz
ilIta
lyM
exic
oG
erm
any
Philip
pine
sD
MFr
ance
Can
ada
Japa
nIn
dia
US
-35
-30
-25
-20
-15
-10
-5
0
5
10
GBP JPY CAD EUR CNY
29
DM Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information LEFT Price-to-earnings (PE) ratio (or multiple) stock price divided by earnings per share which indicates how much investors are paying for a companyrsquos earnings power Cyclically adjusted earnings are 10-year averages adjusted for inflation Source FactSet countriesrsquo statistical organizations Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GBPmdashBritish pound JPYmdashJapanese yen CADmdashCanadian dollar EURmdasheuro CNYmdashChinese yuanSource Federal Reserve Board Haver Analytics Fidelity Investments (AART) as of 63020
53120 20-Year Range
Valuation of Real Exchange Rates
Expensive vs $
Cheap vs $
Shiller CAPE
Last 12-Month Range 63020
Cyclically Adjusted PEs Valuation of Major Currencies vs USD
Non-US Equity and Forex Valuations Relatively AttractiveCyclically adjusted PE (CAPE) ratios for international developed-market and emerging-market equities remained below US valuations providing a relatively favorable long-term backdrop for non-US stocks In Q2 the US dollar depreciated against many of the worldrsquos major currencies nevertheless US dollar valuations remain relatively expensive overall
ASSE
TM
ARKE
TS
LEFT TIPS Treasury Inflation-Protected Securities SOURCE Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Source CME Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 6302030
00
05
10
15
20
25
30
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
10 Year LT Average (Since 1998)
US Treasury Breakeven Inflation Rates
Yield
$0
$20
$40
$60
$80
$100
$120
$140
$160
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
WTI Crude Oil
Inflation Adjusted Price (March 2020 Dollars)
Real Oil Price
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
ASSE
TM
ARKE
TS
31
Past performance is no guarantee of future results Sectors as defined by GICS White line is a theoretical representation of the business cycle as it moves through early mid late and recession phases Green and red shaded portions above respectively represent over- or underperformance relative to the broader market unshaded (white) portions suggest no clear pattern of over- or underperformance Double +ndash signs indicate that the sector is showing a consistent signal across all three metrics full-phase average performance median monthly difference and cycle hit rate A single +ndash indicates a mixed or less consistent signal Return data from 1962 to 2016 Source Fidelity Investments (AART) as of 63020
Business-Cycle Approach to SectorsSector EARLY CYCLE
Economically sensitive sectors may tend to outperform while more defensive sectors have
tended to underperform
Making marginal portfolio allocation changes to manage
drawdown risk with sectorsmay enhance risk-adjusted
returns during this cycle
Defensive and inflation-resistantsectors tend to perform better
while more cyclical sectors underperform
Since performance is generally negative in
recessions investors should focus on the most defensive
historically stable sectors
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
ASSE
TM
ARKE
TS
400
420
440
460
480
500
520
540
092
094
096
098
100
102
104
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18D
ec-1
8M
ar-1
9Ju
n-19
Sep-
19D
ec-1
9M
ar-2
0Ju
n-20
Value vs Growth Performance CRB Raw Industrials Index
LEFT Gray bars represent US recessions as defined by NBER Asset classes represented by Value Fidelity Value ETF Growth Russell 1000reg
Growth Index Commodity Prices CRB Raw Industrials Index Source Federal Reserve Board NBER Haver Analytics Bloomberg Finance LP Fidelity Investments (AART) as of 63020 RIGHT Asset classes represented by Growth Russell 1000reg Growth Index Value Russell 1000reg Value Index Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020 Past performance is no guarantee of future results All indexes are unmanaged You cannot invest directly in an index Unlike mutual funds ETF shares are bought and sold at market price which may be higher or lower than their NAV and are not individually redeemed from the fund32
Value Equity More Attractive after Long UnderperformanceOn a cyclical basis the relative performance of value stocks has tended to correlate generally with the direction of the global economy and in particular with commodity prices which may be bottoming after the worldwide COVID-19 shutdown Meanwhile after a decade of trailing other leading factors and styles valuersquos relative valuations are at their most attractive in roughly 20 years
Price-to-Book Valuation SpreadsValue Relative Performance vs Commodity Prices
Ratio PB RatioIndex
0
1
2
3
4
5
6
7
8
9
10
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Growth vs Value
ASSE
TM
ARKE
TS
33
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Percentile ranks of yields and spreads based on historical period from 1993 to 2020 MBS mortgage-backed securities Source Bloomberg Barclays Bank of America Merrill Lynch JP Morgan Fidelity Investments (AART) as of 63020
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
ECO
NO
MY
22 Ag Agriculture FDI Foreign direct investment ADR American depositary receipt Source Fidelity Investments (AART) as of 63020
US-China Relationship
Geopolitical Rivalry
Trade
Industrial Policy Issuesbull IT sectorbull Health carebull Supply chains
Strategic Competition
Policy Tools of De-Globalization
Military Hegemony
in Asia
Economic Advantage in
Key Areas
Consumer and Other
Goods
Bilateral Flashpointsbull Hong Kongbull Detention campsbull Taiwanbull South China Sea
Policy Action Categories Example
TariffTrade Barriers Raise tariffs to reduce imports
Export and FDI Restrictions Curtail high-tech exports
Industrial Policies Mandate supply chainonshoring
ImmigrationHuman Mobility Tighter borders
Financial Restrictions Penalties
US sanctions tax policies
InfoData Restrictions Chinas firewall
Portfolio Investment Restrictions
US de-lists Chinese ADRs
Politicized Debt Action Selective US default
BroadEconomic
Investment
TariffsMarket Accessbull Phase 1 ag deal
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
ECO
NO
MY
Risks
23
Business Cycle
Asset Allocation Implications
US is in process of emerging from a brief but sharp recession
Policymakers providing abundant support to markets and economy
Emphasize focus on diversified anddisciplined investment strategies
Members hold a wide range of views but see opportunities within asset classes
Opportunities include non-US assets US small cap and value equities TIPS and gold
For illustrative purposes only Diversification does not ensure a profit or guarantee against a loss Source Fidelity Investments (AART) as of 63020
The recovery remains highly uncertain given the size and exogenous nature of
the COVID shock
Policy actions are playing a larger role in driving financial market performance than
in past cycles
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
ASSE
TM
ARKE
TS
EM Emerging Markets EMEA Europe the Middle East and Africa For indexes and other important information used to represent above asset categories see Appendix Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged Sector returns represented by SampP 500 sectors Sector investing involves risk Because of its narrow focus sector investing may be more volatile than investing in more diversified baskets of securities Source Bloomberg Finance LP Fidelity Investments (AART) as of 6302025
US Equity Styles Total ReturnInternational Equities and Global Assets Total Return
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
For illustrative purposes only Past performance is no guarantee of future results Diversification does not ensure a profit or guarantee against a loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Fidelity proprietary analysis based on Monte Carlo simulations using historical index returns Domestic Equity Dow Jones US Total Stock Market Index Foreign Equity MSCI ACWI ex USA Index Investment Grade (IG) Bonds Bloomberg Barclays US Aggregate Bond Index High Yield (HY) Bonds ICE BofA US High Yield Index Source Fidelity Investments Morningstar Bloomberg Barclays data as of 63020
-10
-5
0
5
10
15
20
25
Early Mid Late Recession
US Stocks IG Bonds Cash
Annualized Real ReturnAnnualized Nominal Return
75th
percentile
25th
percentile
Median
Asset Class Performance by Cycle Phase (1950ndash2018)
10-Year Portfolio Return Distribution by Cycle Phase Starting Point
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
ASSE
TM
ARKE
TS
-40
-30
-20
-10
0
10
20
30
40
Jun-
12
Sep-
12
Dec
-12
Mar
-13
Jun-
13
Sep-
13
Dec
-13
Mar
-14
Jun-
14
Sep-
14
Dec
-14
Mar
-15
Jun-
15
Sep-
15
Dec
-15
Mar
-16
Jun-
16
Sep-
16
Dec
-16
Mar
-17
Jun-
17
Sep-
17
Dec
-17
Mar
-18
Jun-
18
Sep-
18
Dec
-18
Mar
-19
Jun-
19
Sep-
19
Dec
-19
Mar
-20
Jun-
20
EM DM US
27Past performance is no guarantee of future results DM Developed Markets EM Emerging Markets EPS Earnings per share Forward EPS Next 12 months expectations Source MSCI Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Global EPS Growth (Trailing 12 Months)
Forward EPS
53
01-49
Percent
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
ASSE
TM
ARKE
TS
0
5
10
15
20
25
2005 2008 2011 2014 2017 2020
DM Trailing PE EM Trailing PE US Trailing PE Forward PE
28
DM Non-US Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Price-to-earnings ratio (PE) stock price divided by earnings per share Also known as the multiple PE gives investors an idea of how much they are paying for a companyrsquos earnings power Long-term average PE for Emerging Markets includes data for 1988ndash2017 for Non-US Developed Markets 1973ndash2016 for the United States 1926ndash2017 Indexes DMmdashMSCI EAFE Index EMmdashMSCI EM Index United StatesmdashSampP 500 Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
EM
US
DM
DM Long-Term Average
US Long-Term Average
EM Long-Term Average
Global Stock Market PE Ratios
Ratio
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
ASSE
TM
ARKE
TS
0
10
20
30
40
50
60
70
80
90
100
Rus
sia
Turk
eySp
ain
Sout
h Ko
rea
UK
Indo
nesi
aC
hina
Aust
ralia EM
Braz
ilIta
lyM
exic
oG
erm
any
Philip
pine
sD
MFr
ance
Can
ada
Japa
nIn
dia
US
-35
-30
-25
-20
-15
-10
-5
0
5
10
GBP JPY CAD EUR CNY
29
DM Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information LEFT Price-to-earnings (PE) ratio (or multiple) stock price divided by earnings per share which indicates how much investors are paying for a companyrsquos earnings power Cyclically adjusted earnings are 10-year averages adjusted for inflation Source FactSet countriesrsquo statistical organizations Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GBPmdashBritish pound JPYmdashJapanese yen CADmdashCanadian dollar EURmdasheuro CNYmdashChinese yuanSource Federal Reserve Board Haver Analytics Fidelity Investments (AART) as of 63020
53120 20-Year Range
Valuation of Real Exchange Rates
Expensive vs $
Cheap vs $
Shiller CAPE
Last 12-Month Range 63020
Cyclically Adjusted PEs Valuation of Major Currencies vs USD
Non-US Equity and Forex Valuations Relatively AttractiveCyclically adjusted PE (CAPE) ratios for international developed-market and emerging-market equities remained below US valuations providing a relatively favorable long-term backdrop for non-US stocks In Q2 the US dollar depreciated against many of the worldrsquos major currencies nevertheless US dollar valuations remain relatively expensive overall
ASSE
TM
ARKE
TS
LEFT TIPS Treasury Inflation-Protected Securities SOURCE Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Source CME Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 6302030
00
05
10
15
20
25
30
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
10 Year LT Average (Since 1998)
US Treasury Breakeven Inflation Rates
Yield
$0
$20
$40
$60
$80
$100
$120
$140
$160
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
WTI Crude Oil
Inflation Adjusted Price (March 2020 Dollars)
Real Oil Price
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
ASSE
TM
ARKE
TS
31
Past performance is no guarantee of future results Sectors as defined by GICS White line is a theoretical representation of the business cycle as it moves through early mid late and recession phases Green and red shaded portions above respectively represent over- or underperformance relative to the broader market unshaded (white) portions suggest no clear pattern of over- or underperformance Double +ndash signs indicate that the sector is showing a consistent signal across all three metrics full-phase average performance median monthly difference and cycle hit rate A single +ndash indicates a mixed or less consistent signal Return data from 1962 to 2016 Source Fidelity Investments (AART) as of 63020
Business-Cycle Approach to SectorsSector EARLY CYCLE
Economically sensitive sectors may tend to outperform while more defensive sectors have
tended to underperform
Making marginal portfolio allocation changes to manage
drawdown risk with sectorsmay enhance risk-adjusted
returns during this cycle
Defensive and inflation-resistantsectors tend to perform better
while more cyclical sectors underperform
Since performance is generally negative in
recessions investors should focus on the most defensive
historically stable sectors
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
ASSE
TM
ARKE
TS
400
420
440
460
480
500
520
540
092
094
096
098
100
102
104
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18D
ec-1
8M
ar-1
9Ju
n-19
Sep-
19D
ec-1
9M
ar-2
0Ju
n-20
Value vs Growth Performance CRB Raw Industrials Index
LEFT Gray bars represent US recessions as defined by NBER Asset classes represented by Value Fidelity Value ETF Growth Russell 1000reg
Growth Index Commodity Prices CRB Raw Industrials Index Source Federal Reserve Board NBER Haver Analytics Bloomberg Finance LP Fidelity Investments (AART) as of 63020 RIGHT Asset classes represented by Growth Russell 1000reg Growth Index Value Russell 1000reg Value Index Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020 Past performance is no guarantee of future results All indexes are unmanaged You cannot invest directly in an index Unlike mutual funds ETF shares are bought and sold at market price which may be higher or lower than their NAV and are not individually redeemed from the fund32
Value Equity More Attractive after Long UnderperformanceOn a cyclical basis the relative performance of value stocks has tended to correlate generally with the direction of the global economy and in particular with commodity prices which may be bottoming after the worldwide COVID-19 shutdown Meanwhile after a decade of trailing other leading factors and styles valuersquos relative valuations are at their most attractive in roughly 20 years
Price-to-Book Valuation SpreadsValue Relative Performance vs Commodity Prices
Ratio PB RatioIndex
0
1
2
3
4
5
6
7
8
9
10
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Growth vs Value
ASSE
TM
ARKE
TS
33
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Percentile ranks of yields and spreads based on historical period from 1993 to 2020 MBS mortgage-backed securities Source Bloomberg Barclays Bank of America Merrill Lynch JP Morgan Fidelity Investments (AART) as of 63020
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
ECO
NO
MY
Risks
23
Business Cycle
Asset Allocation Implications
US is in process of emerging from a brief but sharp recession
Policymakers providing abundant support to markets and economy
Emphasize focus on diversified anddisciplined investment strategies
Members hold a wide range of views but see opportunities within asset classes
Opportunities include non-US assets US small cap and value equities TIPS and gold
For illustrative purposes only Diversification does not ensure a profit or guarantee against a loss Source Fidelity Investments (AART) as of 63020
The recovery remains highly uncertain given the size and exogenous nature of
the COVID shock
Policy actions are playing a larger role in driving financial market performance than
in past cycles
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
ASSE
TM
ARKE
TS
EM Emerging Markets EMEA Europe the Middle East and Africa For indexes and other important information used to represent above asset categories see Appendix Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged Sector returns represented by SampP 500 sectors Sector investing involves risk Because of its narrow focus sector investing may be more volatile than investing in more diversified baskets of securities Source Bloomberg Finance LP Fidelity Investments (AART) as of 6302025
US Equity Styles Total ReturnInternational Equities and Global Assets Total Return
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
For illustrative purposes only Past performance is no guarantee of future results Diversification does not ensure a profit or guarantee against a loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Fidelity proprietary analysis based on Monte Carlo simulations using historical index returns Domestic Equity Dow Jones US Total Stock Market Index Foreign Equity MSCI ACWI ex USA Index Investment Grade (IG) Bonds Bloomberg Barclays US Aggregate Bond Index High Yield (HY) Bonds ICE BofA US High Yield Index Source Fidelity Investments Morningstar Bloomberg Barclays data as of 63020
-10
-5
0
5
10
15
20
25
Early Mid Late Recession
US Stocks IG Bonds Cash
Annualized Real ReturnAnnualized Nominal Return
75th
percentile
25th
percentile
Median
Asset Class Performance by Cycle Phase (1950ndash2018)
10-Year Portfolio Return Distribution by Cycle Phase Starting Point
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
ASSE
TM
ARKE
TS
-40
-30
-20
-10
0
10
20
30
40
Jun-
12
Sep-
12
Dec
-12
Mar
-13
Jun-
13
Sep-
13
Dec
-13
Mar
-14
Jun-
14
Sep-
14
Dec
-14
Mar
-15
Jun-
15
Sep-
15
Dec
-15
Mar
-16
Jun-
16
Sep-
16
Dec
-16
Mar
-17
Jun-
17
Sep-
17
Dec
-17
Mar
-18
Jun-
18
Sep-
18
Dec
-18
Mar
-19
Jun-
19
Sep-
19
Dec
-19
Mar
-20
Jun-
20
EM DM US
27Past performance is no guarantee of future results DM Developed Markets EM Emerging Markets EPS Earnings per share Forward EPS Next 12 months expectations Source MSCI Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Global EPS Growth (Trailing 12 Months)
Forward EPS
53
01-49
Percent
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
ASSE
TM
ARKE
TS
0
5
10
15
20
25
2005 2008 2011 2014 2017 2020
DM Trailing PE EM Trailing PE US Trailing PE Forward PE
28
DM Non-US Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Price-to-earnings ratio (PE) stock price divided by earnings per share Also known as the multiple PE gives investors an idea of how much they are paying for a companyrsquos earnings power Long-term average PE for Emerging Markets includes data for 1988ndash2017 for Non-US Developed Markets 1973ndash2016 for the United States 1926ndash2017 Indexes DMmdashMSCI EAFE Index EMmdashMSCI EM Index United StatesmdashSampP 500 Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
EM
US
DM
DM Long-Term Average
US Long-Term Average
EM Long-Term Average
Global Stock Market PE Ratios
Ratio
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
ASSE
TM
ARKE
TS
0
10
20
30
40
50
60
70
80
90
100
Rus
sia
Turk
eySp
ain
Sout
h Ko
rea
UK
Indo
nesi
aC
hina
Aust
ralia EM
Braz
ilIta
lyM
exic
oG
erm
any
Philip
pine
sD
MFr
ance
Can
ada
Japa
nIn
dia
US
-35
-30
-25
-20
-15
-10
-5
0
5
10
GBP JPY CAD EUR CNY
29
DM Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information LEFT Price-to-earnings (PE) ratio (or multiple) stock price divided by earnings per share which indicates how much investors are paying for a companyrsquos earnings power Cyclically adjusted earnings are 10-year averages adjusted for inflation Source FactSet countriesrsquo statistical organizations Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GBPmdashBritish pound JPYmdashJapanese yen CADmdashCanadian dollar EURmdasheuro CNYmdashChinese yuanSource Federal Reserve Board Haver Analytics Fidelity Investments (AART) as of 63020
53120 20-Year Range
Valuation of Real Exchange Rates
Expensive vs $
Cheap vs $
Shiller CAPE
Last 12-Month Range 63020
Cyclically Adjusted PEs Valuation of Major Currencies vs USD
Non-US Equity and Forex Valuations Relatively AttractiveCyclically adjusted PE (CAPE) ratios for international developed-market and emerging-market equities remained below US valuations providing a relatively favorable long-term backdrop for non-US stocks In Q2 the US dollar depreciated against many of the worldrsquos major currencies nevertheless US dollar valuations remain relatively expensive overall
ASSE
TM
ARKE
TS
LEFT TIPS Treasury Inflation-Protected Securities SOURCE Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Source CME Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 6302030
00
05
10
15
20
25
30
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
10 Year LT Average (Since 1998)
US Treasury Breakeven Inflation Rates
Yield
$0
$20
$40
$60
$80
$100
$120
$140
$160
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
WTI Crude Oil
Inflation Adjusted Price (March 2020 Dollars)
Real Oil Price
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
ASSE
TM
ARKE
TS
31
Past performance is no guarantee of future results Sectors as defined by GICS White line is a theoretical representation of the business cycle as it moves through early mid late and recession phases Green and red shaded portions above respectively represent over- or underperformance relative to the broader market unshaded (white) portions suggest no clear pattern of over- or underperformance Double +ndash signs indicate that the sector is showing a consistent signal across all three metrics full-phase average performance median monthly difference and cycle hit rate A single +ndash indicates a mixed or less consistent signal Return data from 1962 to 2016 Source Fidelity Investments (AART) as of 63020
Business-Cycle Approach to SectorsSector EARLY CYCLE
Economically sensitive sectors may tend to outperform while more defensive sectors have
tended to underperform
Making marginal portfolio allocation changes to manage
drawdown risk with sectorsmay enhance risk-adjusted
returns during this cycle
Defensive and inflation-resistantsectors tend to perform better
while more cyclical sectors underperform
Since performance is generally negative in
recessions investors should focus on the most defensive
historically stable sectors
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
ASSE
TM
ARKE
TS
400
420
440
460
480
500
520
540
092
094
096
098
100
102
104
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18D
ec-1
8M
ar-1
9Ju
n-19
Sep-
19D
ec-1
9M
ar-2
0Ju
n-20
Value vs Growth Performance CRB Raw Industrials Index
LEFT Gray bars represent US recessions as defined by NBER Asset classes represented by Value Fidelity Value ETF Growth Russell 1000reg
Growth Index Commodity Prices CRB Raw Industrials Index Source Federal Reserve Board NBER Haver Analytics Bloomberg Finance LP Fidelity Investments (AART) as of 63020 RIGHT Asset classes represented by Growth Russell 1000reg Growth Index Value Russell 1000reg Value Index Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020 Past performance is no guarantee of future results All indexes are unmanaged You cannot invest directly in an index Unlike mutual funds ETF shares are bought and sold at market price which may be higher or lower than their NAV and are not individually redeemed from the fund32
Value Equity More Attractive after Long UnderperformanceOn a cyclical basis the relative performance of value stocks has tended to correlate generally with the direction of the global economy and in particular with commodity prices which may be bottoming after the worldwide COVID-19 shutdown Meanwhile after a decade of trailing other leading factors and styles valuersquos relative valuations are at their most attractive in roughly 20 years
Price-to-Book Valuation SpreadsValue Relative Performance vs Commodity Prices
Ratio PB RatioIndex
0
1
2
3
4
5
6
7
8
9
10
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Growth vs Value
ASSE
TM
ARKE
TS
33
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Percentile ranks of yields and spreads based on historical period from 1993 to 2020 MBS mortgage-backed securities Source Bloomberg Barclays Bank of America Merrill Lynch JP Morgan Fidelity Investments (AART) as of 63020
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
Asset Markets
ASSE
TM
ARKE
TS
EM Emerging Markets EMEA Europe the Middle East and Africa For indexes and other important information used to represent above asset categories see Appendix Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged Sector returns represented by SampP 500 sectors Sector investing involves risk Because of its narrow focus sector investing may be more volatile than investing in more diversified baskets of securities Source Bloomberg Finance LP Fidelity Investments (AART) as of 6302025
US Equity Styles Total ReturnInternational Equities and Global Assets Total Return
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
For illustrative purposes only Past performance is no guarantee of future results Diversification does not ensure a profit or guarantee against a loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Fidelity proprietary analysis based on Monte Carlo simulations using historical index returns Domestic Equity Dow Jones US Total Stock Market Index Foreign Equity MSCI ACWI ex USA Index Investment Grade (IG) Bonds Bloomberg Barclays US Aggregate Bond Index High Yield (HY) Bonds ICE BofA US High Yield Index Source Fidelity Investments Morningstar Bloomberg Barclays data as of 63020
-10
-5
0
5
10
15
20
25
Early Mid Late Recession
US Stocks IG Bonds Cash
Annualized Real ReturnAnnualized Nominal Return
75th
percentile
25th
percentile
Median
Asset Class Performance by Cycle Phase (1950ndash2018)
10-Year Portfolio Return Distribution by Cycle Phase Starting Point
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
ASSE
TM
ARKE
TS
-40
-30
-20
-10
0
10
20
30
40
Jun-
12
Sep-
12
Dec
-12
Mar
-13
Jun-
13
Sep-
13
Dec
-13
Mar
-14
Jun-
14
Sep-
14
Dec
-14
Mar
-15
Jun-
15
Sep-
15
Dec
-15
Mar
-16
Jun-
16
Sep-
16
Dec
-16
Mar
-17
Jun-
17
Sep-
17
Dec
-17
Mar
-18
Jun-
18
Sep-
18
Dec
-18
Mar
-19
Jun-
19
Sep-
19
Dec
-19
Mar
-20
Jun-
20
EM DM US
27Past performance is no guarantee of future results DM Developed Markets EM Emerging Markets EPS Earnings per share Forward EPS Next 12 months expectations Source MSCI Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Global EPS Growth (Trailing 12 Months)
Forward EPS
53
01-49
Percent
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
ASSE
TM
ARKE
TS
0
5
10
15
20
25
2005 2008 2011 2014 2017 2020
DM Trailing PE EM Trailing PE US Trailing PE Forward PE
28
DM Non-US Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Price-to-earnings ratio (PE) stock price divided by earnings per share Also known as the multiple PE gives investors an idea of how much they are paying for a companyrsquos earnings power Long-term average PE for Emerging Markets includes data for 1988ndash2017 for Non-US Developed Markets 1973ndash2016 for the United States 1926ndash2017 Indexes DMmdashMSCI EAFE Index EMmdashMSCI EM Index United StatesmdashSampP 500 Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
EM
US
DM
DM Long-Term Average
US Long-Term Average
EM Long-Term Average
Global Stock Market PE Ratios
Ratio
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
ASSE
TM
ARKE
TS
0
10
20
30
40
50
60
70
80
90
100
Rus
sia
Turk
eySp
ain
Sout
h Ko
rea
UK
Indo
nesi
aC
hina
Aust
ralia EM
Braz
ilIta
lyM
exic
oG
erm
any
Philip
pine
sD
MFr
ance
Can
ada
Japa
nIn
dia
US
-35
-30
-25
-20
-15
-10
-5
0
5
10
GBP JPY CAD EUR CNY
29
DM Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information LEFT Price-to-earnings (PE) ratio (or multiple) stock price divided by earnings per share which indicates how much investors are paying for a companyrsquos earnings power Cyclically adjusted earnings are 10-year averages adjusted for inflation Source FactSet countriesrsquo statistical organizations Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GBPmdashBritish pound JPYmdashJapanese yen CADmdashCanadian dollar EURmdasheuro CNYmdashChinese yuanSource Federal Reserve Board Haver Analytics Fidelity Investments (AART) as of 63020
53120 20-Year Range
Valuation of Real Exchange Rates
Expensive vs $
Cheap vs $
Shiller CAPE
Last 12-Month Range 63020
Cyclically Adjusted PEs Valuation of Major Currencies vs USD
Non-US Equity and Forex Valuations Relatively AttractiveCyclically adjusted PE (CAPE) ratios for international developed-market and emerging-market equities remained below US valuations providing a relatively favorable long-term backdrop for non-US stocks In Q2 the US dollar depreciated against many of the worldrsquos major currencies nevertheless US dollar valuations remain relatively expensive overall
ASSE
TM
ARKE
TS
LEFT TIPS Treasury Inflation-Protected Securities SOURCE Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Source CME Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 6302030
00
05
10
15
20
25
30
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
10 Year LT Average (Since 1998)
US Treasury Breakeven Inflation Rates
Yield
$0
$20
$40
$60
$80
$100
$120
$140
$160
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
WTI Crude Oil
Inflation Adjusted Price (March 2020 Dollars)
Real Oil Price
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
ASSE
TM
ARKE
TS
31
Past performance is no guarantee of future results Sectors as defined by GICS White line is a theoretical representation of the business cycle as it moves through early mid late and recession phases Green and red shaded portions above respectively represent over- or underperformance relative to the broader market unshaded (white) portions suggest no clear pattern of over- or underperformance Double +ndash signs indicate that the sector is showing a consistent signal across all three metrics full-phase average performance median monthly difference and cycle hit rate A single +ndash indicates a mixed or less consistent signal Return data from 1962 to 2016 Source Fidelity Investments (AART) as of 63020
Business-Cycle Approach to SectorsSector EARLY CYCLE
Economically sensitive sectors may tend to outperform while more defensive sectors have
tended to underperform
Making marginal portfolio allocation changes to manage
drawdown risk with sectorsmay enhance risk-adjusted
returns during this cycle
Defensive and inflation-resistantsectors tend to perform better
while more cyclical sectors underperform
Since performance is generally negative in
recessions investors should focus on the most defensive
historically stable sectors
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
ASSE
TM
ARKE
TS
400
420
440
460
480
500
520
540
092
094
096
098
100
102
104
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18D
ec-1
8M
ar-1
9Ju
n-19
Sep-
19D
ec-1
9M
ar-2
0Ju
n-20
Value vs Growth Performance CRB Raw Industrials Index
LEFT Gray bars represent US recessions as defined by NBER Asset classes represented by Value Fidelity Value ETF Growth Russell 1000reg
Growth Index Commodity Prices CRB Raw Industrials Index Source Federal Reserve Board NBER Haver Analytics Bloomberg Finance LP Fidelity Investments (AART) as of 63020 RIGHT Asset classes represented by Growth Russell 1000reg Growth Index Value Russell 1000reg Value Index Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020 Past performance is no guarantee of future results All indexes are unmanaged You cannot invest directly in an index Unlike mutual funds ETF shares are bought and sold at market price which may be higher or lower than their NAV and are not individually redeemed from the fund32
Value Equity More Attractive after Long UnderperformanceOn a cyclical basis the relative performance of value stocks has tended to correlate generally with the direction of the global economy and in particular with commodity prices which may be bottoming after the worldwide COVID-19 shutdown Meanwhile after a decade of trailing other leading factors and styles valuersquos relative valuations are at their most attractive in roughly 20 years
Price-to-Book Valuation SpreadsValue Relative Performance vs Commodity Prices
Ratio PB RatioIndex
0
1
2
3
4
5
6
7
8
9
10
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Growth vs Value
ASSE
TM
ARKE
TS
33
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Percentile ranks of yields and spreads based on historical period from 1993 to 2020 MBS mortgage-backed securities Source Bloomberg Barclays Bank of America Merrill Lynch JP Morgan Fidelity Investments (AART) as of 63020
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
ASSE
TM
ARKE
TS
EM Emerging Markets EMEA Europe the Middle East and Africa For indexes and other important information used to represent above asset categories see Appendix Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged Sector returns represented by SampP 500 sectors Sector investing involves risk Because of its narrow focus sector investing may be more volatile than investing in more diversified baskets of securities Source Bloomberg Finance LP Fidelity Investments (AART) as of 6302025
US Equity Styles Total ReturnInternational Equities and Global Assets Total Return
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
For illustrative purposes only Past performance is no guarantee of future results Diversification does not ensure a profit or guarantee against a loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Fidelity proprietary analysis based on Monte Carlo simulations using historical index returns Domestic Equity Dow Jones US Total Stock Market Index Foreign Equity MSCI ACWI ex USA Index Investment Grade (IG) Bonds Bloomberg Barclays US Aggregate Bond Index High Yield (HY) Bonds ICE BofA US High Yield Index Source Fidelity Investments Morningstar Bloomberg Barclays data as of 63020
-10
-5
0
5
10
15
20
25
Early Mid Late Recession
US Stocks IG Bonds Cash
Annualized Real ReturnAnnualized Nominal Return
75th
percentile
25th
percentile
Median
Asset Class Performance by Cycle Phase (1950ndash2018)
10-Year Portfolio Return Distribution by Cycle Phase Starting Point
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
ASSE
TM
ARKE
TS
-40
-30
-20
-10
0
10
20
30
40
Jun-
12
Sep-
12
Dec
-12
Mar
-13
Jun-
13
Sep-
13
Dec
-13
Mar
-14
Jun-
14
Sep-
14
Dec
-14
Mar
-15
Jun-
15
Sep-
15
Dec
-15
Mar
-16
Jun-
16
Sep-
16
Dec
-16
Mar
-17
Jun-
17
Sep-
17
Dec
-17
Mar
-18
Jun-
18
Sep-
18
Dec
-18
Mar
-19
Jun-
19
Sep-
19
Dec
-19
Mar
-20
Jun-
20
EM DM US
27Past performance is no guarantee of future results DM Developed Markets EM Emerging Markets EPS Earnings per share Forward EPS Next 12 months expectations Source MSCI Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Global EPS Growth (Trailing 12 Months)
Forward EPS
53
01-49
Percent
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
ASSE
TM
ARKE
TS
0
5
10
15
20
25
2005 2008 2011 2014 2017 2020
DM Trailing PE EM Trailing PE US Trailing PE Forward PE
28
DM Non-US Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Price-to-earnings ratio (PE) stock price divided by earnings per share Also known as the multiple PE gives investors an idea of how much they are paying for a companyrsquos earnings power Long-term average PE for Emerging Markets includes data for 1988ndash2017 for Non-US Developed Markets 1973ndash2016 for the United States 1926ndash2017 Indexes DMmdashMSCI EAFE Index EMmdashMSCI EM Index United StatesmdashSampP 500 Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
EM
US
DM
DM Long-Term Average
US Long-Term Average
EM Long-Term Average
Global Stock Market PE Ratios
Ratio
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
ASSE
TM
ARKE
TS
0
10
20
30
40
50
60
70
80
90
100
Rus
sia
Turk
eySp
ain
Sout
h Ko
rea
UK
Indo
nesi
aC
hina
Aust
ralia EM
Braz
ilIta
lyM
exic
oG
erm
any
Philip
pine
sD
MFr
ance
Can
ada
Japa
nIn
dia
US
-35
-30
-25
-20
-15
-10
-5
0
5
10
GBP JPY CAD EUR CNY
29
DM Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information LEFT Price-to-earnings (PE) ratio (or multiple) stock price divided by earnings per share which indicates how much investors are paying for a companyrsquos earnings power Cyclically adjusted earnings are 10-year averages adjusted for inflation Source FactSet countriesrsquo statistical organizations Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GBPmdashBritish pound JPYmdashJapanese yen CADmdashCanadian dollar EURmdasheuro CNYmdashChinese yuanSource Federal Reserve Board Haver Analytics Fidelity Investments (AART) as of 63020
53120 20-Year Range
Valuation of Real Exchange Rates
Expensive vs $
Cheap vs $
Shiller CAPE
Last 12-Month Range 63020
Cyclically Adjusted PEs Valuation of Major Currencies vs USD
Non-US Equity and Forex Valuations Relatively AttractiveCyclically adjusted PE (CAPE) ratios for international developed-market and emerging-market equities remained below US valuations providing a relatively favorable long-term backdrop for non-US stocks In Q2 the US dollar depreciated against many of the worldrsquos major currencies nevertheless US dollar valuations remain relatively expensive overall
ASSE
TM
ARKE
TS
LEFT TIPS Treasury Inflation-Protected Securities SOURCE Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Source CME Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 6302030
00
05
10
15
20
25
30
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
10 Year LT Average (Since 1998)
US Treasury Breakeven Inflation Rates
Yield
$0
$20
$40
$60
$80
$100
$120
$140
$160
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
WTI Crude Oil
Inflation Adjusted Price (March 2020 Dollars)
Real Oil Price
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
ASSE
TM
ARKE
TS
31
Past performance is no guarantee of future results Sectors as defined by GICS White line is a theoretical representation of the business cycle as it moves through early mid late and recession phases Green and red shaded portions above respectively represent over- or underperformance relative to the broader market unshaded (white) portions suggest no clear pattern of over- or underperformance Double +ndash signs indicate that the sector is showing a consistent signal across all three metrics full-phase average performance median monthly difference and cycle hit rate A single +ndash indicates a mixed or less consistent signal Return data from 1962 to 2016 Source Fidelity Investments (AART) as of 63020
Business-Cycle Approach to SectorsSector EARLY CYCLE
Economically sensitive sectors may tend to outperform while more defensive sectors have
tended to underperform
Making marginal portfolio allocation changes to manage
drawdown risk with sectorsmay enhance risk-adjusted
returns during this cycle
Defensive and inflation-resistantsectors tend to perform better
while more cyclical sectors underperform
Since performance is generally negative in
recessions investors should focus on the most defensive
historically stable sectors
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
ASSE
TM
ARKE
TS
400
420
440
460
480
500
520
540
092
094
096
098
100
102
104
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18D
ec-1
8M
ar-1
9Ju
n-19
Sep-
19D
ec-1
9M
ar-2
0Ju
n-20
Value vs Growth Performance CRB Raw Industrials Index
LEFT Gray bars represent US recessions as defined by NBER Asset classes represented by Value Fidelity Value ETF Growth Russell 1000reg
Growth Index Commodity Prices CRB Raw Industrials Index Source Federal Reserve Board NBER Haver Analytics Bloomberg Finance LP Fidelity Investments (AART) as of 63020 RIGHT Asset classes represented by Growth Russell 1000reg Growth Index Value Russell 1000reg Value Index Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020 Past performance is no guarantee of future results All indexes are unmanaged You cannot invest directly in an index Unlike mutual funds ETF shares are bought and sold at market price which may be higher or lower than their NAV and are not individually redeemed from the fund32
Value Equity More Attractive after Long UnderperformanceOn a cyclical basis the relative performance of value stocks has tended to correlate generally with the direction of the global economy and in particular with commodity prices which may be bottoming after the worldwide COVID-19 shutdown Meanwhile after a decade of trailing other leading factors and styles valuersquos relative valuations are at their most attractive in roughly 20 years
Price-to-Book Valuation SpreadsValue Relative Performance vs Commodity Prices
Ratio PB RatioIndex
0
1
2
3
4
5
6
7
8
9
10
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Growth vs Value
ASSE
TM
ARKE
TS
33
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Percentile ranks of yields and spreads based on historical period from 1993 to 2020 MBS mortgage-backed securities Source Bloomberg Barclays Bank of America Merrill Lynch JP Morgan Fidelity Investments (AART) as of 63020
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
For illustrative purposes only Past performance is no guarantee of future results Diversification does not ensure a profit or guarantee against a loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Fidelity proprietary analysis based on Monte Carlo simulations using historical index returns Domestic Equity Dow Jones US Total Stock Market Index Foreign Equity MSCI ACWI ex USA Index Investment Grade (IG) Bonds Bloomberg Barclays US Aggregate Bond Index High Yield (HY) Bonds ICE BofA US High Yield Index Source Fidelity Investments Morningstar Bloomberg Barclays data as of 63020
-10
-5
0
5
10
15
20
25
Early Mid Late Recession
US Stocks IG Bonds Cash
Annualized Real ReturnAnnualized Nominal Return
75th
percentile
25th
percentile
Median
Asset Class Performance by Cycle Phase (1950ndash2018)
10-Year Portfolio Return Distribution by Cycle Phase Starting Point
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
ASSE
TM
ARKE
TS
-40
-30
-20
-10
0
10
20
30
40
Jun-
12
Sep-
12
Dec
-12
Mar
-13
Jun-
13
Sep-
13
Dec
-13
Mar
-14
Jun-
14
Sep-
14
Dec
-14
Mar
-15
Jun-
15
Sep-
15
Dec
-15
Mar
-16
Jun-
16
Sep-
16
Dec
-16
Mar
-17
Jun-
17
Sep-
17
Dec
-17
Mar
-18
Jun-
18
Sep-
18
Dec
-18
Mar
-19
Jun-
19
Sep-
19
Dec
-19
Mar
-20
Jun-
20
EM DM US
27Past performance is no guarantee of future results DM Developed Markets EM Emerging Markets EPS Earnings per share Forward EPS Next 12 months expectations Source MSCI Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Global EPS Growth (Trailing 12 Months)
Forward EPS
53
01-49
Percent
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
ASSE
TM
ARKE
TS
0
5
10
15
20
25
2005 2008 2011 2014 2017 2020
DM Trailing PE EM Trailing PE US Trailing PE Forward PE
28
DM Non-US Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Price-to-earnings ratio (PE) stock price divided by earnings per share Also known as the multiple PE gives investors an idea of how much they are paying for a companyrsquos earnings power Long-term average PE for Emerging Markets includes data for 1988ndash2017 for Non-US Developed Markets 1973ndash2016 for the United States 1926ndash2017 Indexes DMmdashMSCI EAFE Index EMmdashMSCI EM Index United StatesmdashSampP 500 Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
EM
US
DM
DM Long-Term Average
US Long-Term Average
EM Long-Term Average
Global Stock Market PE Ratios
Ratio
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
ASSE
TM
ARKE
TS
0
10
20
30
40
50
60
70
80
90
100
Rus
sia
Turk
eySp
ain
Sout
h Ko
rea
UK
Indo
nesi
aC
hina
Aust
ralia EM
Braz
ilIta
lyM
exic
oG
erm
any
Philip
pine
sD
MFr
ance
Can
ada
Japa
nIn
dia
US
-35
-30
-25
-20
-15
-10
-5
0
5
10
GBP JPY CAD EUR CNY
29
DM Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information LEFT Price-to-earnings (PE) ratio (or multiple) stock price divided by earnings per share which indicates how much investors are paying for a companyrsquos earnings power Cyclically adjusted earnings are 10-year averages adjusted for inflation Source FactSet countriesrsquo statistical organizations Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GBPmdashBritish pound JPYmdashJapanese yen CADmdashCanadian dollar EURmdasheuro CNYmdashChinese yuanSource Federal Reserve Board Haver Analytics Fidelity Investments (AART) as of 63020
53120 20-Year Range
Valuation of Real Exchange Rates
Expensive vs $
Cheap vs $
Shiller CAPE
Last 12-Month Range 63020
Cyclically Adjusted PEs Valuation of Major Currencies vs USD
Non-US Equity and Forex Valuations Relatively AttractiveCyclically adjusted PE (CAPE) ratios for international developed-market and emerging-market equities remained below US valuations providing a relatively favorable long-term backdrop for non-US stocks In Q2 the US dollar depreciated against many of the worldrsquos major currencies nevertheless US dollar valuations remain relatively expensive overall
ASSE
TM
ARKE
TS
LEFT TIPS Treasury Inflation-Protected Securities SOURCE Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Source CME Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 6302030
00
05
10
15
20
25
30
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
10 Year LT Average (Since 1998)
US Treasury Breakeven Inflation Rates
Yield
$0
$20
$40
$60
$80
$100
$120
$140
$160
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
WTI Crude Oil
Inflation Adjusted Price (March 2020 Dollars)
Real Oil Price
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
ASSE
TM
ARKE
TS
31
Past performance is no guarantee of future results Sectors as defined by GICS White line is a theoretical representation of the business cycle as it moves through early mid late and recession phases Green and red shaded portions above respectively represent over- or underperformance relative to the broader market unshaded (white) portions suggest no clear pattern of over- or underperformance Double +ndash signs indicate that the sector is showing a consistent signal across all three metrics full-phase average performance median monthly difference and cycle hit rate A single +ndash indicates a mixed or less consistent signal Return data from 1962 to 2016 Source Fidelity Investments (AART) as of 63020
Business-Cycle Approach to SectorsSector EARLY CYCLE
Economically sensitive sectors may tend to outperform while more defensive sectors have
tended to underperform
Making marginal portfolio allocation changes to manage
drawdown risk with sectorsmay enhance risk-adjusted
returns during this cycle
Defensive and inflation-resistantsectors tend to perform better
while more cyclical sectors underperform
Since performance is generally negative in
recessions investors should focus on the most defensive
historically stable sectors
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
ASSE
TM
ARKE
TS
400
420
440
460
480
500
520
540
092
094
096
098
100
102
104
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18D
ec-1
8M
ar-1
9Ju
n-19
Sep-
19D
ec-1
9M
ar-2
0Ju
n-20
Value vs Growth Performance CRB Raw Industrials Index
LEFT Gray bars represent US recessions as defined by NBER Asset classes represented by Value Fidelity Value ETF Growth Russell 1000reg
Growth Index Commodity Prices CRB Raw Industrials Index Source Federal Reserve Board NBER Haver Analytics Bloomberg Finance LP Fidelity Investments (AART) as of 63020 RIGHT Asset classes represented by Growth Russell 1000reg Growth Index Value Russell 1000reg Value Index Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020 Past performance is no guarantee of future results All indexes are unmanaged You cannot invest directly in an index Unlike mutual funds ETF shares are bought and sold at market price which may be higher or lower than their NAV and are not individually redeemed from the fund32
Value Equity More Attractive after Long UnderperformanceOn a cyclical basis the relative performance of value stocks has tended to correlate generally with the direction of the global economy and in particular with commodity prices which may be bottoming after the worldwide COVID-19 shutdown Meanwhile after a decade of trailing other leading factors and styles valuersquos relative valuations are at their most attractive in roughly 20 years
Price-to-Book Valuation SpreadsValue Relative Performance vs Commodity Prices
Ratio PB RatioIndex
0
1
2
3
4
5
6
7
8
9
10
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Growth vs Value
ASSE
TM
ARKE
TS
33
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Percentile ranks of yields and spreads based on historical period from 1993 to 2020 MBS mortgage-backed securities Source Bloomberg Barclays Bank of America Merrill Lynch JP Morgan Fidelity Investments (AART) as of 63020
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
ASSE
TM
ARKE
TS
-40
-30
-20
-10
0
10
20
30
40
Jun-
12
Sep-
12
Dec
-12
Mar
-13
Jun-
13
Sep-
13
Dec
-13
Mar
-14
Jun-
14
Sep-
14
Dec
-14
Mar
-15
Jun-
15
Sep-
15
Dec
-15
Mar
-16
Jun-
16
Sep-
16
Dec
-16
Mar
-17
Jun-
17
Sep-
17
Dec
-17
Mar
-18
Jun-
18
Sep-
18
Dec
-18
Mar
-19
Jun-
19
Sep-
19
Dec
-19
Mar
-20
Jun-
20
EM DM US
27Past performance is no guarantee of future results DM Developed Markets EM Emerging Markets EPS Earnings per share Forward EPS Next 12 months expectations Source MSCI Bloomberg Finance LP Fidelity Investments (AART) as of 63020
Global EPS Growth (Trailing 12 Months)
Forward EPS
53
01-49
Percent
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
ASSE
TM
ARKE
TS
0
5
10
15
20
25
2005 2008 2011 2014 2017 2020
DM Trailing PE EM Trailing PE US Trailing PE Forward PE
28
DM Non-US Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Price-to-earnings ratio (PE) stock price divided by earnings per share Also known as the multiple PE gives investors an idea of how much they are paying for a companyrsquos earnings power Long-term average PE for Emerging Markets includes data for 1988ndash2017 for Non-US Developed Markets 1973ndash2016 for the United States 1926ndash2017 Indexes DMmdashMSCI EAFE Index EMmdashMSCI EM Index United StatesmdashSampP 500 Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
EM
US
DM
DM Long-Term Average
US Long-Term Average
EM Long-Term Average
Global Stock Market PE Ratios
Ratio
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
ASSE
TM
ARKE
TS
0
10
20
30
40
50
60
70
80
90
100
Rus
sia
Turk
eySp
ain
Sout
h Ko
rea
UK
Indo
nesi
aC
hina
Aust
ralia EM
Braz
ilIta
lyM
exic
oG
erm
any
Philip
pine
sD
MFr
ance
Can
ada
Japa
nIn
dia
US
-35
-30
-25
-20
-15
-10
-5
0
5
10
GBP JPY CAD EUR CNY
29
DM Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information LEFT Price-to-earnings (PE) ratio (or multiple) stock price divided by earnings per share which indicates how much investors are paying for a companyrsquos earnings power Cyclically adjusted earnings are 10-year averages adjusted for inflation Source FactSet countriesrsquo statistical organizations Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GBPmdashBritish pound JPYmdashJapanese yen CADmdashCanadian dollar EURmdasheuro CNYmdashChinese yuanSource Federal Reserve Board Haver Analytics Fidelity Investments (AART) as of 63020
53120 20-Year Range
Valuation of Real Exchange Rates
Expensive vs $
Cheap vs $
Shiller CAPE
Last 12-Month Range 63020
Cyclically Adjusted PEs Valuation of Major Currencies vs USD
Non-US Equity and Forex Valuations Relatively AttractiveCyclically adjusted PE (CAPE) ratios for international developed-market and emerging-market equities remained below US valuations providing a relatively favorable long-term backdrop for non-US stocks In Q2 the US dollar depreciated against many of the worldrsquos major currencies nevertheless US dollar valuations remain relatively expensive overall
ASSE
TM
ARKE
TS
LEFT TIPS Treasury Inflation-Protected Securities SOURCE Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Source CME Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 6302030
00
05
10
15
20
25
30
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
10 Year LT Average (Since 1998)
US Treasury Breakeven Inflation Rates
Yield
$0
$20
$40
$60
$80
$100
$120
$140
$160
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
WTI Crude Oil
Inflation Adjusted Price (March 2020 Dollars)
Real Oil Price
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
ASSE
TM
ARKE
TS
31
Past performance is no guarantee of future results Sectors as defined by GICS White line is a theoretical representation of the business cycle as it moves through early mid late and recession phases Green and red shaded portions above respectively represent over- or underperformance relative to the broader market unshaded (white) portions suggest no clear pattern of over- or underperformance Double +ndash signs indicate that the sector is showing a consistent signal across all three metrics full-phase average performance median monthly difference and cycle hit rate A single +ndash indicates a mixed or less consistent signal Return data from 1962 to 2016 Source Fidelity Investments (AART) as of 63020
Business-Cycle Approach to SectorsSector EARLY CYCLE
Economically sensitive sectors may tend to outperform while more defensive sectors have
tended to underperform
Making marginal portfolio allocation changes to manage
drawdown risk with sectorsmay enhance risk-adjusted
returns during this cycle
Defensive and inflation-resistantsectors tend to perform better
while more cyclical sectors underperform
Since performance is generally negative in
recessions investors should focus on the most defensive
historically stable sectors
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
ASSE
TM
ARKE
TS
400
420
440
460
480
500
520
540
092
094
096
098
100
102
104
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18D
ec-1
8M
ar-1
9Ju
n-19
Sep-
19D
ec-1
9M
ar-2
0Ju
n-20
Value vs Growth Performance CRB Raw Industrials Index
LEFT Gray bars represent US recessions as defined by NBER Asset classes represented by Value Fidelity Value ETF Growth Russell 1000reg
Growth Index Commodity Prices CRB Raw Industrials Index Source Federal Reserve Board NBER Haver Analytics Bloomberg Finance LP Fidelity Investments (AART) as of 63020 RIGHT Asset classes represented by Growth Russell 1000reg Growth Index Value Russell 1000reg Value Index Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020 Past performance is no guarantee of future results All indexes are unmanaged You cannot invest directly in an index Unlike mutual funds ETF shares are bought and sold at market price which may be higher or lower than their NAV and are not individually redeemed from the fund32
Value Equity More Attractive after Long UnderperformanceOn a cyclical basis the relative performance of value stocks has tended to correlate generally with the direction of the global economy and in particular with commodity prices which may be bottoming after the worldwide COVID-19 shutdown Meanwhile after a decade of trailing other leading factors and styles valuersquos relative valuations are at their most attractive in roughly 20 years
Price-to-Book Valuation SpreadsValue Relative Performance vs Commodity Prices
Ratio PB RatioIndex
0
1
2
3
4
5
6
7
8
9
10
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Growth vs Value
ASSE
TM
ARKE
TS
33
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Percentile ranks of yields and spreads based on historical period from 1993 to 2020 MBS mortgage-backed securities Source Bloomberg Barclays Bank of America Merrill Lynch JP Morgan Fidelity Investments (AART) as of 63020
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
ASSE
TM
ARKE
TS
0
5
10
15
20
25
2005 2008 2011 2014 2017 2020
DM Trailing PE EM Trailing PE US Trailing PE Forward PE
28
DM Non-US Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Price-to-earnings ratio (PE) stock price divided by earnings per share Also known as the multiple PE gives investors an idea of how much they are paying for a companyrsquos earnings power Long-term average PE for Emerging Markets includes data for 1988ndash2017 for Non-US Developed Markets 1973ndash2016 for the United States 1926ndash2017 Indexes DMmdashMSCI EAFE Index EMmdashMSCI EM Index United StatesmdashSampP 500 Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020
EM
US
DM
DM Long-Term Average
US Long-Term Average
EM Long-Term Average
Global Stock Market PE Ratios
Ratio
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
ASSE
TM
ARKE
TS
0
10
20
30
40
50
60
70
80
90
100
Rus
sia
Turk
eySp
ain
Sout
h Ko
rea
UK
Indo
nesi
aC
hina
Aust
ralia EM
Braz
ilIta
lyM
exic
oG
erm
any
Philip
pine
sD
MFr
ance
Can
ada
Japa
nIn
dia
US
-35
-30
-25
-20
-15
-10
-5
0
5
10
GBP JPY CAD EUR CNY
29
DM Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information LEFT Price-to-earnings (PE) ratio (or multiple) stock price divided by earnings per share which indicates how much investors are paying for a companyrsquos earnings power Cyclically adjusted earnings are 10-year averages adjusted for inflation Source FactSet countriesrsquo statistical organizations Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GBPmdashBritish pound JPYmdashJapanese yen CADmdashCanadian dollar EURmdasheuro CNYmdashChinese yuanSource Federal Reserve Board Haver Analytics Fidelity Investments (AART) as of 63020
53120 20-Year Range
Valuation of Real Exchange Rates
Expensive vs $
Cheap vs $
Shiller CAPE
Last 12-Month Range 63020
Cyclically Adjusted PEs Valuation of Major Currencies vs USD
Non-US Equity and Forex Valuations Relatively AttractiveCyclically adjusted PE (CAPE) ratios for international developed-market and emerging-market equities remained below US valuations providing a relatively favorable long-term backdrop for non-US stocks In Q2 the US dollar depreciated against many of the worldrsquos major currencies nevertheless US dollar valuations remain relatively expensive overall
ASSE
TM
ARKE
TS
LEFT TIPS Treasury Inflation-Protected Securities SOURCE Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Source CME Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 6302030
00
05
10
15
20
25
30
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
10 Year LT Average (Since 1998)
US Treasury Breakeven Inflation Rates
Yield
$0
$20
$40
$60
$80
$100
$120
$140
$160
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
WTI Crude Oil
Inflation Adjusted Price (March 2020 Dollars)
Real Oil Price
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
ASSE
TM
ARKE
TS
31
Past performance is no guarantee of future results Sectors as defined by GICS White line is a theoretical representation of the business cycle as it moves through early mid late and recession phases Green and red shaded portions above respectively represent over- or underperformance relative to the broader market unshaded (white) portions suggest no clear pattern of over- or underperformance Double +ndash signs indicate that the sector is showing a consistent signal across all three metrics full-phase average performance median monthly difference and cycle hit rate A single +ndash indicates a mixed or less consistent signal Return data from 1962 to 2016 Source Fidelity Investments (AART) as of 63020
Business-Cycle Approach to SectorsSector EARLY CYCLE
Economically sensitive sectors may tend to outperform while more defensive sectors have
tended to underperform
Making marginal portfolio allocation changes to manage
drawdown risk with sectorsmay enhance risk-adjusted
returns during this cycle
Defensive and inflation-resistantsectors tend to perform better
while more cyclical sectors underperform
Since performance is generally negative in
recessions investors should focus on the most defensive
historically stable sectors
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
ASSE
TM
ARKE
TS
400
420
440
460
480
500
520
540
092
094
096
098
100
102
104
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18D
ec-1
8M
ar-1
9Ju
n-19
Sep-
19D
ec-1
9M
ar-2
0Ju
n-20
Value vs Growth Performance CRB Raw Industrials Index
LEFT Gray bars represent US recessions as defined by NBER Asset classes represented by Value Fidelity Value ETF Growth Russell 1000reg
Growth Index Commodity Prices CRB Raw Industrials Index Source Federal Reserve Board NBER Haver Analytics Bloomberg Finance LP Fidelity Investments (AART) as of 63020 RIGHT Asset classes represented by Growth Russell 1000reg Growth Index Value Russell 1000reg Value Index Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020 Past performance is no guarantee of future results All indexes are unmanaged You cannot invest directly in an index Unlike mutual funds ETF shares are bought and sold at market price which may be higher or lower than their NAV and are not individually redeemed from the fund32
Value Equity More Attractive after Long UnderperformanceOn a cyclical basis the relative performance of value stocks has tended to correlate generally with the direction of the global economy and in particular with commodity prices which may be bottoming after the worldwide COVID-19 shutdown Meanwhile after a decade of trailing other leading factors and styles valuersquos relative valuations are at their most attractive in roughly 20 years
Price-to-Book Valuation SpreadsValue Relative Performance vs Commodity Prices
Ratio PB RatioIndex
0
1
2
3
4
5
6
7
8
9
10
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Growth vs Value
ASSE
TM
ARKE
TS
33
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Percentile ranks of yields and spreads based on historical period from 1993 to 2020 MBS mortgage-backed securities Source Bloomberg Barclays Bank of America Merrill Lynch JP Morgan Fidelity Investments (AART) as of 63020
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
ASSE
TM
ARKE
TS
0
10
20
30
40
50
60
70
80
90
100
Rus
sia
Turk
eySp
ain
Sout
h Ko
rea
UK
Indo
nesi
aC
hina
Aust
ralia EM
Braz
ilIta
lyM
exic
oG
erm
any
Philip
pine
sD
MFr
ance
Can
ada
Japa
nIn
dia
US
-35
-30
-25
-20
-15
-10
-5
0
5
10
GBP JPY CAD EUR CNY
29
DM Developed Markets EM Emerging Markets Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information LEFT Price-to-earnings (PE) ratio (or multiple) stock price divided by earnings per share which indicates how much investors are paying for a companyrsquos earnings power Cyclically adjusted earnings are 10-year averages adjusted for inflation Source FactSet countriesrsquo statistical organizations Haver Analytics Fidelity Investments (AART) as of 53120 RIGHT GBPmdashBritish pound JPYmdashJapanese yen CADmdashCanadian dollar EURmdasheuro CNYmdashChinese yuanSource Federal Reserve Board Haver Analytics Fidelity Investments (AART) as of 63020
53120 20-Year Range
Valuation of Real Exchange Rates
Expensive vs $
Cheap vs $
Shiller CAPE
Last 12-Month Range 63020
Cyclically Adjusted PEs Valuation of Major Currencies vs USD
Non-US Equity and Forex Valuations Relatively AttractiveCyclically adjusted PE (CAPE) ratios for international developed-market and emerging-market equities remained below US valuations providing a relatively favorable long-term backdrop for non-US stocks In Q2 the US dollar depreciated against many of the worldrsquos major currencies nevertheless US dollar valuations remain relatively expensive overall
ASSE
TM
ARKE
TS
LEFT TIPS Treasury Inflation-Protected Securities SOURCE Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Source CME Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 6302030
00
05
10
15
20
25
30
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
10 Year LT Average (Since 1998)
US Treasury Breakeven Inflation Rates
Yield
$0
$20
$40
$60
$80
$100
$120
$140
$160
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
WTI Crude Oil
Inflation Adjusted Price (March 2020 Dollars)
Real Oil Price
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
ASSE
TM
ARKE
TS
31
Past performance is no guarantee of future results Sectors as defined by GICS White line is a theoretical representation of the business cycle as it moves through early mid late and recession phases Green and red shaded portions above respectively represent over- or underperformance relative to the broader market unshaded (white) portions suggest no clear pattern of over- or underperformance Double +ndash signs indicate that the sector is showing a consistent signal across all three metrics full-phase average performance median monthly difference and cycle hit rate A single +ndash indicates a mixed or less consistent signal Return data from 1962 to 2016 Source Fidelity Investments (AART) as of 63020
Business-Cycle Approach to SectorsSector EARLY CYCLE
Economically sensitive sectors may tend to outperform while more defensive sectors have
tended to underperform
Making marginal portfolio allocation changes to manage
drawdown risk with sectorsmay enhance risk-adjusted
returns during this cycle
Defensive and inflation-resistantsectors tend to perform better
while more cyclical sectors underperform
Since performance is generally negative in
recessions investors should focus on the most defensive
historically stable sectors
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
ASSE
TM
ARKE
TS
400
420
440
460
480
500
520
540
092
094
096
098
100
102
104
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18D
ec-1
8M
ar-1
9Ju
n-19
Sep-
19D
ec-1
9M
ar-2
0Ju
n-20
Value vs Growth Performance CRB Raw Industrials Index
LEFT Gray bars represent US recessions as defined by NBER Asset classes represented by Value Fidelity Value ETF Growth Russell 1000reg
Growth Index Commodity Prices CRB Raw Industrials Index Source Federal Reserve Board NBER Haver Analytics Bloomberg Finance LP Fidelity Investments (AART) as of 63020 RIGHT Asset classes represented by Growth Russell 1000reg Growth Index Value Russell 1000reg Value Index Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020 Past performance is no guarantee of future results All indexes are unmanaged You cannot invest directly in an index Unlike mutual funds ETF shares are bought and sold at market price which may be higher or lower than their NAV and are not individually redeemed from the fund32
Value Equity More Attractive after Long UnderperformanceOn a cyclical basis the relative performance of value stocks has tended to correlate generally with the direction of the global economy and in particular with commodity prices which may be bottoming after the worldwide COVID-19 shutdown Meanwhile after a decade of trailing other leading factors and styles valuersquos relative valuations are at their most attractive in roughly 20 years
Price-to-Book Valuation SpreadsValue Relative Performance vs Commodity Prices
Ratio PB RatioIndex
0
1
2
3
4
5
6
7
8
9
10
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Growth vs Value
ASSE
TM
ARKE
TS
33
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Percentile ranks of yields and spreads based on historical period from 1993 to 2020 MBS mortgage-backed securities Source Bloomberg Barclays Bank of America Merrill Lynch JP Morgan Fidelity Investments (AART) as of 63020
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
ASSE
TM
ARKE
TS
LEFT TIPS Treasury Inflation-Protected Securities SOURCE Haver Analytics Fidelity Investments (AART) as of 63020 RIGHT Source CME Bureau of Labor Statistics Haver Analytics Fidelity Investments (AART) as of 6302030
00
05
10
15
20
25
30
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
10 Year LT Average (Since 1998)
US Treasury Breakeven Inflation Rates
Yield
$0
$20
$40
$60
$80
$100
$120
$140
$160
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
WTI Crude Oil
Inflation Adjusted Price (March 2020 Dollars)
Real Oil Price
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
ASSE
TM
ARKE
TS
31
Past performance is no guarantee of future results Sectors as defined by GICS White line is a theoretical representation of the business cycle as it moves through early mid late and recession phases Green and red shaded portions above respectively represent over- or underperformance relative to the broader market unshaded (white) portions suggest no clear pattern of over- or underperformance Double +ndash signs indicate that the sector is showing a consistent signal across all three metrics full-phase average performance median monthly difference and cycle hit rate A single +ndash indicates a mixed or less consistent signal Return data from 1962 to 2016 Source Fidelity Investments (AART) as of 63020
Business-Cycle Approach to SectorsSector EARLY CYCLE
Economically sensitive sectors may tend to outperform while more defensive sectors have
tended to underperform
Making marginal portfolio allocation changes to manage
drawdown risk with sectorsmay enhance risk-adjusted
returns during this cycle
Defensive and inflation-resistantsectors tend to perform better
while more cyclical sectors underperform
Since performance is generally negative in
recessions investors should focus on the most defensive
historically stable sectors
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
ASSE
TM
ARKE
TS
400
420
440
460
480
500
520
540
092
094
096
098
100
102
104
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18D
ec-1
8M
ar-1
9Ju
n-19
Sep-
19D
ec-1
9M
ar-2
0Ju
n-20
Value vs Growth Performance CRB Raw Industrials Index
LEFT Gray bars represent US recessions as defined by NBER Asset classes represented by Value Fidelity Value ETF Growth Russell 1000reg
Growth Index Commodity Prices CRB Raw Industrials Index Source Federal Reserve Board NBER Haver Analytics Bloomberg Finance LP Fidelity Investments (AART) as of 63020 RIGHT Asset classes represented by Growth Russell 1000reg Growth Index Value Russell 1000reg Value Index Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020 Past performance is no guarantee of future results All indexes are unmanaged You cannot invest directly in an index Unlike mutual funds ETF shares are bought and sold at market price which may be higher or lower than their NAV and are not individually redeemed from the fund32
Value Equity More Attractive after Long UnderperformanceOn a cyclical basis the relative performance of value stocks has tended to correlate generally with the direction of the global economy and in particular with commodity prices which may be bottoming after the worldwide COVID-19 shutdown Meanwhile after a decade of trailing other leading factors and styles valuersquos relative valuations are at their most attractive in roughly 20 years
Price-to-Book Valuation SpreadsValue Relative Performance vs Commodity Prices
Ratio PB RatioIndex
0
1
2
3
4
5
6
7
8
9
10
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Growth vs Value
ASSE
TM
ARKE
TS
33
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Percentile ranks of yields and spreads based on historical period from 1993 to 2020 MBS mortgage-backed securities Source Bloomberg Barclays Bank of America Merrill Lynch JP Morgan Fidelity Investments (AART) as of 63020
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
ASSE
TM
ARKE
TS
31
Past performance is no guarantee of future results Sectors as defined by GICS White line is a theoretical representation of the business cycle as it moves through early mid late and recession phases Green and red shaded portions above respectively represent over- or underperformance relative to the broader market unshaded (white) portions suggest no clear pattern of over- or underperformance Double +ndash signs indicate that the sector is showing a consistent signal across all three metrics full-phase average performance median monthly difference and cycle hit rate A single +ndash indicates a mixed or less consistent signal Return data from 1962 to 2016 Source Fidelity Investments (AART) as of 63020
Business-Cycle Approach to SectorsSector EARLY CYCLE
Economically sensitive sectors may tend to outperform while more defensive sectors have
tended to underperform
Making marginal portfolio allocation changes to manage
drawdown risk with sectorsmay enhance risk-adjusted
returns during this cycle
Defensive and inflation-resistantsectors tend to perform better
while more cyclical sectors underperform
Since performance is generally negative in
recessions investors should focus on the most defensive
historically stable sectors
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
ASSE
TM
ARKE
TS
400
420
440
460
480
500
520
540
092
094
096
098
100
102
104
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18D
ec-1
8M
ar-1
9Ju
n-19
Sep-
19D
ec-1
9M
ar-2
0Ju
n-20
Value vs Growth Performance CRB Raw Industrials Index
LEFT Gray bars represent US recessions as defined by NBER Asset classes represented by Value Fidelity Value ETF Growth Russell 1000reg
Growth Index Commodity Prices CRB Raw Industrials Index Source Federal Reserve Board NBER Haver Analytics Bloomberg Finance LP Fidelity Investments (AART) as of 63020 RIGHT Asset classes represented by Growth Russell 1000reg Growth Index Value Russell 1000reg Value Index Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020 Past performance is no guarantee of future results All indexes are unmanaged You cannot invest directly in an index Unlike mutual funds ETF shares are bought and sold at market price which may be higher or lower than their NAV and are not individually redeemed from the fund32
Value Equity More Attractive after Long UnderperformanceOn a cyclical basis the relative performance of value stocks has tended to correlate generally with the direction of the global economy and in particular with commodity prices which may be bottoming after the worldwide COVID-19 shutdown Meanwhile after a decade of trailing other leading factors and styles valuersquos relative valuations are at their most attractive in roughly 20 years
Price-to-Book Valuation SpreadsValue Relative Performance vs Commodity Prices
Ratio PB RatioIndex
0
1
2
3
4
5
6
7
8
9
10
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Growth vs Value
ASSE
TM
ARKE
TS
33
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Percentile ranks of yields and spreads based on historical period from 1993 to 2020 MBS mortgage-backed securities Source Bloomberg Barclays Bank of America Merrill Lynch JP Morgan Fidelity Investments (AART) as of 63020
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
ASSE
TM
ARKE
TS
400
420
440
460
480
500
520
540
092
094
096
098
100
102
104
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18D
ec-1
8M
ar-1
9Ju
n-19
Sep-
19D
ec-1
9M
ar-2
0Ju
n-20
Value vs Growth Performance CRB Raw Industrials Index
LEFT Gray bars represent US recessions as defined by NBER Asset classes represented by Value Fidelity Value ETF Growth Russell 1000reg
Growth Index Commodity Prices CRB Raw Industrials Index Source Federal Reserve Board NBER Haver Analytics Bloomberg Finance LP Fidelity Investments (AART) as of 63020 RIGHT Asset classes represented by Growth Russell 1000reg Growth Index Value Russell 1000reg Value Index Source Bloomberg Finance LP Fidelity Investments (AART) as of 63020 Past performance is no guarantee of future results All indexes are unmanaged You cannot invest directly in an index Unlike mutual funds ETF shares are bought and sold at market price which may be higher or lower than their NAV and are not individually redeemed from the fund32
Value Equity More Attractive after Long UnderperformanceOn a cyclical basis the relative performance of value stocks has tended to correlate generally with the direction of the global economy and in particular with commodity prices which may be bottoming after the worldwide COVID-19 shutdown Meanwhile after a decade of trailing other leading factors and styles valuersquos relative valuations are at their most attractive in roughly 20 years
Price-to-Book Valuation SpreadsValue Relative Performance vs Commodity Prices
Ratio PB RatioIndex
0
1
2
3
4
5
6
7
8
9
10
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Growth vs Value
ASSE
TM
ARKE
TS
33
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Percentile ranks of yields and spreads based on historical period from 1993 to 2020 MBS mortgage-backed securities Source Bloomberg Barclays Bank of America Merrill Lynch JP Morgan Fidelity Investments (AART) as of 63020
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
ASSE
TM
ARKE
TS
33
Past performance is no guarantee of future results It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Percentile ranks of yields and spreads based on historical period from 1993 to 2020 MBS mortgage-backed securities Source Bloomberg Barclays Bank of America Merrill Lynch JP Morgan Fidelity Investments (AART) as of 63020
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
Long-Term Themes
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
LON
G-T
ERM
35
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Periodic Table of Returns
Past performance is no guarantee of future results Diversificationasset allocation does not ensure a profit or guarantee against loss It is not possible to invest directly in an index All indexes are unmanaged See Appendix for important index information Asset classes represented by CommoditiesmdashBloomberg Commodity Index Emerging-Market StocksmdashMSCI Emerging Markets Index Non-US Developed-Country StocksmdashMSCI EAFE Index Growth StocksmdashRussell 3000 Growth Index High-Yield BondsmdashICE BofA US High Yield Index Investment-Grade BondsmdashBloomberg Barclays US Aggregate Bond Index Large Cap StocksmdashSampP 500 index Real EstateREITsmdashFTSE NAREIT All Equity Total Return Index Small Cap StocksmdashRussell 2000 Index Value StocksmdashRussell 3000 Value Index Source Morningstar Standard amp Poorrsquos Haver Analytics Fidelity Investments (AART) as of 63020
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
-0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
-0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Legend
32
14
26
56
32
35
35
40
5
79
28
8
20
39
28
5
21
38
0
36
9
Growth Stocks
26
8
10
47
26
21
33
16
-20
58
27
8
19
34
14
3
18
30
-2
31
6
Investment-Grade Bonds
12
5
4
39
21
14
27
12
-26
37
19
4
18
33
13
1
18
26
-2
26
1
60 Large Cap40 IG Bonds
8
2
-2
37
18
12
22
11
-34
32
18
4
18
32
12
1
12
22
-3
26
-3
Large Cap Stocks
-1
-2
-6
31
17
7
18
7
-36
28
17
2
16
23
11
1
12
15
-4
26
-5
High-Yield Bonds
-3
-4
-9
31
11
5
16
6
-36
27
16
2
16
19
6
0
11
15
-4
22
-10
Emerging-Market Stocks
-5
-4
-15
29
11
5
12
5
-37
26
15
0
16
7
5
-4
9
13
-9
22
-11
Foreign-Developed Country Stocks
-9
-12
-16
28
9
5
11
2
-38
20
15
-4
15
3
3
-4
8
9
-11
18
-13
Small Cap Stocks
-14
-20
-20
24
8
4
9
-1
-38
19
12
-12
11
-2
-2
-5
7
8
-11
14
-17
Value Stocks
-22
-20
-22
19
7
3
4
-2
-43
18
8
-13
4
-2
-4
-15
3
4
-11
9
-19
REITs
-31
-21
-28
4
4
2
2
-16
-53
6
7
-18
-1
-10
-17
-25
2
1
-14
8
-19
Commodities
LON
G-T
ERM
0
1
2
3
4
5
6
7
8
9
10
Italy
Spai
n
Japa
n
Ger
man
y
Fran
ce
Net
herla
nds
UK
Sout
h Ko
rea
Can
ada
Aust
ralia
Swed
en
US
Rus
sia
Turk
ey
Braz
il
Thai
land
Chi
na
Mex
ico
Peru
Col
ombi
a
Sout
h Af
rica
Mal
aysi
a
Philip
pine
s
Indo
nesi
a
Indi
a
Developed Markets Emerging Markets Last 20 Years
Secular Forecast Slower Global Growth EM to LeadSlowing labor force growth and aging demographics are expected to tamp down global growth over the next two decades We expect GDP growth of emerging countries to outpace that of developed markets over the long term providing a relatively favorable secular backdrop for emerging-market equity returns
36
Annualized Rate
Past performance is no guarantee of future results EM Emerging Markets GDP Gross Domestic ProductSource OECD Fidelity Investments (AART) as of 63020
Global Real GDP Growth
Last 20 years 20-year forecast
27 21
Real GDP 20-Year Growth Forecasts vs History
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
LON
G-T
ERM
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Regime Shift Driven by Powerful Underlying Dynamics
Policy Dynamic Expected Shift
Monetary
bull Increased political influence on decisionsbull Sustained financial repressionbull More active role in financial marketsbull More permissive of inflation
Globalization bull Trade capital and labor flows more restrictedbull Weaponized economic measures for geopolitical ends
Fiscal bull More permissive of large deficits and rising debt levels
Political risk bull More commonplace in economic and commercial affairs
Rising Populist Demands
Geopolitical Instability
Anti-Globalization Pressure
Widespread Aging
Demographics
Unprecedented Accumulation
of Debt
Source Fidelity Investments (AART) as of 6302037
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
LON
G-T
ERM
LEFT The demographic support ratio is calculated as the number of workers (15-64 years old)The number of retirees (65 and older)Source United Nations Haver Analytics Fidelity Investments (AART) as of 103119 RIGHT This level attained by the UK (1821) Netherlands (1834) France (1944) and Japan (1945) Forecasts by Fidelity Investments (AART) Source International Monetary Fund United Nations Fidelity Investments (AART) as of 53120
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
LON
G-T
ERM
5
10
15
20
25
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Global ImportsGDP
39
Trade Globalization
Less Globalized
More Globalized
Ratio
Source International Monetary Fund (IMF) World Bank Haver Analytics Fidelity Investments (AART) as of 123119
Geopolitical Rivalry
TradeStrategic Competition
Military Hegemony
in Asia
IT Sector Advanced Industrials
Consumer and Other
Goods
Secular Trends for Asset Markets
bull Less rules-based and less market-oriented global system
bull Pressure on corporate profit margins
bull Inflationary pressures
bull Lower global asset price correlations
bull Active opportunitiesmdashlocation and politics matter more
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
LON
G-T
ERM
40
Extraordinary Monetary Policy Goals vs Consequences
Source Fidelity Investments (AART) as of 63020
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Less-productive firms stay in businessLimited impact on currency
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
LON
G-T
ERM
41
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Secular Factors
Possible Developments
Risks to Inflation
PolicyFed targets higher inflation
More stimulative fiscal policy
Aging Demographics
Elderly people
bull Spend less (reducing demand)
bull Work less (reducing supply)
Peak Globalization More expensive goodslabor
TechnologicalProgress More robots Amazon effect
LEFT Source Bank of International Settlements International Monetary Fund Maddison Project Fidelity Investments (AART) and the Jordagrave-Schularick-Taylor Macrohistory Database compiled by Oscar Jordagrave Moritz Schularick and Alan M Taylor Accessed through wwwmacrohistorynet as of 123118 RIGHT Source Fidelity Investments (AART) as of 33120
0
50
100
150
200
250
1908
1918
1928
1938
1948
1958
1968
1978
1988
1998
2008
2018
Private Public
Percent
Global Debt as a Share of GDP Possible Secular Impacts to Inflation
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
SampP 500 Percentage of New Contributions to Stocks
Data from Fidelityrsquos recordkeeping platform which services more than 16 million corporate defined contribution (DC) participants Stock contributions the percentage of all new directed deferrals (contributions) into stocks by participants via the available investment options in defined contribution plans administered by Fidelity Investments Shaded areas represent periods when the stock market (SampP 500 index) fell by 20 or more peak to trough Diversification does not ensure a profit or guarantee against loss Standard amp Poorrsquos Bloomberg Finance LP Fidelity Investments as of 33120
Price
42
Contributions
Fidelity Plan Participantsrsquo Contribution to Equities
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
LON
G-T
ERM
43
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Impact of Feedback Frequency on Investment Decisions
Monthly Yearly
In a study subjects were assigned simulated conditions that were similar to making portfolio decisions on a monthly or yearly basis Source Thaler RH A Tversky D Kahneman and A Schwartz ldquoThe Effect of Myopia and Loss Aversion on Risk Taking An Experimental Testrdquo The Quarterly Journal of Economics 1122 (1997) used by permission of Oxford University Press Fidelity Investments (AART) as of 63020
Stocks70
Bonds30Stocks
41
Bonds59
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities 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 informationInformation 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 clients 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 andor servicing of these products or services including Fidelity funds certain third-party funds and products and certain investment services
Investment decisions should be based on an individualrsquos own goals time horizon and tolerance for risk Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer accountant or other advisor before making any financial decision These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security sector or investment strategyFidelity 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 situationPast performance and dividend rates are historical and do not guarantee future resultsInvesting involves risk including risk of lossDiversification does not ensure a profit or guarantee against lossIndex or benchmark performance presented in this document does not reflect the deduction of advisory fees transaction charges and other expenses which would reduce performanceIndexes are unmanaged It is not possible to invest directly in an indexAlthough 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 paymentsAdditionally bonds and short-term investments entail greater inflation riskmdashor the risk that the return of an investment will not keep up with increases in the prices of goods and servicesmdashthan stocks Increases in real interest rates can cause the price of inflation-protected debt securities to decreaseStock markets especially non-US 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 companiesGrowth 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 timeLower-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 lossFloating 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 andor 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)sThe commodities industry can be significantly affected by commodity prices world events import controls worldwide competition government regulations and economic conditionsThe 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 countriesChanges in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industryLeverage can magnify the impact that adverse issuer political regulatory market or economic developments have on a company In the event of bankruptcy a companyrsquos creditors take precedence over the companyrsquos stockholders
Appendix Important Information
44
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important InformationMarket Indexes
Index returns on slide 25 represented by GrowthmdashRussell 3000reg Growth Index Large CapsmdashSampP 500reg index Mid CapsmdashRussell Midcapreg Index Small CapsmdashRussell 2000reg
Index ValuemdashRussell 3000reg Value Index ACWI ex USAmdashMSCI All Country World Index (ACWI) CanadamdashMSCI Canada Index CommoditiesmdashBloomberg Commodity Index EAFEmdashMSCI EAFE (Europe Australasia Far East) Index EAFE Small CapmdashMSCI EAFE Small Cap Index EM AsiamdashMSCI Emerging Markets Asia Index EMEA (Europe Middle East and Africa)mdashMSCI EM EMEA Index Emerging Markets (EM)mdashMSCI EM Index EuropemdashMSCI Europe Index GoldmdashGold Bullion Price LBMA PM Fix JapanmdashMSCI Japan Index Latin AmericamdashMSCI EM Latin America Index ABS (Asset-Backed Securities)mdashBloomberg Barclays ABS Index AgencymdashBloomberg Barclays US Agency Index AggregatemdashBloomberg Barclays US Aggregate Bond Index CMBS (Commercial Mortgage-Backed Securities)mdashBloomberg Barclays Investment-Grade CMBS Index CreditmdashBloomberg Barclays US Credit Bond Index EM Debt (Emerging-Market Debt)mdashJP Morgan EMBI Global Index High YieldmdashICE BofA US High Yield Index Leveraged LoanmdashSampPLSTA Leveraged Loan Index Long Government amp Credit (Investment-Grade)mdashBloomberg Barclays Long Government amp Credit Index MBS (Mortgage-Backed Securities)mdashBloomberg Barclays MBS Index MunicipalmdashBloomberg Barclays Municipal Bond Index TIPS (Treasury Inflation-Protected Securities)mdashBloomberg Barclays US TIPS Index TreasuriesmdashBloomberg Barclays US Treasury Index Low VolatilitymdashFidelity US Low Volatility Factor Index ValuemdashFidelity US Value Factor Index QualitymdashFidelity US Quality Factor Index SizemdashFidelity Small-Mid Factor Index MomentummdashFidelity US Momentum Factor Index TR YieldmdashFidelity High Dividend IndexBloomberg 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 Bloomberg Barclays CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3BBB-BBB- or above) using Moodyrsquos SampP and Fitch respectively with maturities of at least one year Bloomberg Barclays Long US Government Credit Index includes all publicly issued US 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 Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more Bloomberg Barclays US Agency Bond Index is a market value-weighted index of US Agency government and investment-grade corporate fixed-rate debt issues Bloomberg Barclays US Aggregate Bond is a broad-based market value-weighted benchmark that measures the performance of the investment-grade US dollar-denominated fixed-rate taxable bond market Bloomberg Barclays US Credit Bond Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more Bloomberg Barclays US MBS Index is a market value-weighted index of fixed-rate securities that represent interests in pools of mortgage loans including balloon mortgages with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA) the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp (FHLMC)
Bloomberg Barclays US Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the US Treasury Bloomberg Barclays US Treasury Bond Index is a market value-weighted index of public obligations of the US Treasury with maturities of one year or more Bloomberg 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 commodityBloomberg Barclays US Corporate High Yield Bond Index is a market value-weighted index covering the universe of dollar-denominated fixed-rate non-investment grade debt Eurobonds and debt issues from countries designated as emerging markets are excluded Dow Jones US Total Stock Market IndexSM is a full market capitalization-weighted index of all equity securities of US-headquartered companies with readily available price data Fidelity US Low Volatility Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with lower volatility than the broader market Fidelity US Value Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies that have attractive valuations Fidelity US Quality Factor Index is designed to reflect the performance of stocks of large and mid-capitalization US companies with a higher quality profile than the broader market Fidelity Small-Mid Factor Index is designed to reflect the performance of stocks of small and mid-capitalization US companies with attractive valuations high quality profiles positive momentum signals and lower volatility than the broader market Fidelity US Momentum Factor Index is designed to reflect the performance of stocks of large and mid-capital-ization US companies that exhibit positive momentum signals Fidelity High Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends FTSEreg National Association of Real Estate Investment Trusts (NAREITreg) 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 FTSEreg NAREITreg 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)ICE BofA US High Yield Index is a market capitalization-weighted index of US dollar-denominated below-investment-grade corporate debt publicly issued in the US marketJPMreg EMBI Global Index and its country sub-indexes tracks total returns for the US dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities such as Brady bonds loans and Eurobonds MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of developed and emerging markets MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets excluding the United States
45
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
Market Indexes (continued)MSCI Emerging Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets MSCI EM Asia Index is a market capitalization-weighted index designed to measure equity market performance of EM countries of Asia MSCI EM Europe Middle East and Africa Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in the EM countries of Europe the Middle East and Africa MSCI EM Latin America Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in Latin America MSCI World ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets outside the United States MSCI Europe Australasia Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets excluding the US and Canada MSCI EAFE Small Cap Index is a market capitalization-weighted index designed to measure the investable equity market performance of small cap stocks for global investors in developed markets excluding the US and CanadaMSCI USA Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market MSCI USA Value Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall value style characteristics MSCI USA Growth Index is a market capitalization-weighted index designed to measure the performance of the large- and mid-cap segments of the US equity market exhibiting overall growth style characteristicsMSCI Europe Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of the developed markets in Europe MSCI Canada Index is a market capitalization-weighted index designed to measure equity market performance in Canada MSCI Japan Index is a market capitalization-weighted index designed to measure equity market performance in JapanRussell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large-cap segment of the US equity market Russell 1000 Growth Index is a market-capitalization-weighted index designed to measure the performance of the large-cap growth segment of the US equity market It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 1000 Value Index is a market-capitalization-weighted index designed to measure the performance of the large-cap value segment of the US equity market It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates Russell 2000reg Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the US equity market It includes approximately 2000 of the smallest securities in the Russell 3000 Index Russell 3000reg Index is a market capitalization-weighted index designed to measure the performance of the 3000 largest companies in the US equity market
Russell 3000 Growth Index is a market capitalization-weighted index designed to measure the performance of the broad growth segment of the US equity market It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates Russell 3000 Value Index is a market capitalization-weighted index designed to measure the performance of the small to mid cap value segment of the US equity market It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates Russell Midcapreg Index is a market capitalization-weighted index designed to measure the performance of the mid cap segment of the US equity market It contains approximately 800 of the smallest securities in the Russell 1000 IndexSampP 500reg is a market capitalization-weighted index of 500 common stocks chosen for market size liquidity and industry group representation to represent US equity performance SampP 500 is a registered service mark of The McGraw-Hill Companies Inc and has been licensed for use by Fidelity Distributors Corporation and its affiliates Sectors and Industries are defined by Global Industry Classification Standards (GICSreg) except where noted otherwise SampP 500 sectors are defined as follows Consumer Discretionarymdashcompanies that tend to be the most sensitive to economic cycles Consumer Staplesmdashcompanies whose businesses are less sensitive to economic cycles Energymdashcompanies 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 andor transportation of oil and gas products coal and consumable fuels Financialsmdashcompanies involved in activities such as banking consumer finance investment banking and brokerage asset management insurance and investments and mortgage real estate investment trusts (REITs) Health Caremdashcompanies 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 Industrialsmdashcompanies that manufacture and distribute capital goods provide commercial services and supplies or provide transportation services Information Technologymdash companies in technology software and services and technology hardware and equipment Materialsmdashcompanies that engage in a wide range of commodity-related manufacturing Real Estatemdashcompanies in real estate development operations and related services as well as equity REITs Communication Servicesmdashcompanies that facilitate communication and offer related content through various media it includes media companies moved from Consumer Discretionary and internet services companies moved from Information Technology Utilitiesmdashcompanies considered electric gas or water utilities or that operate as independent producers andor distributors of powerStandard amp PoorrsquosLoan Syndications and Trading Association (SampPLSTA) Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of US dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings spreads and interest payments
Appendix Important Information
46
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important Information
Appendix Important InformationOther Indexes
Commodity Research Bureau (CRB) Raw Industrials Index is a sub-index of 13 markets burlap copper scrap cotton hides lead scrap print cloth rosin rubber steel scrap tallow tin wool tops and zincConsumer Price Index (CPI) is a monthly inflation indicator that measures the change in the cost of a fixed basket of products and services including housing electricity food and transportationLondon Bullion Market Association (LBMA) publishes the international benchmark price of gold in USD twice daily LBMA Gold price auction takes place by ICE Benchmark Administration (IBA) at 1030 and 1500 with the price set in USD per fine troy ounceVIXreg is the Chicago Board Options Exchange Volatility Indexreg a weighted average of prices on SampP 500 options with a constant maturity of 30 days to expiration It is designed to measure the marketrsquos expectation of near-term stock market volatilityICE BofA MOVE (Merrill Option Volatility Estimate) Index is a measure of US interest rate volatility that tracks the movement in US Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year 5-year 10-year and 30-year TreasuriesJP Morgan Global FX Volatility Index is a benchmark for implied volatility across the global foreign-exchange (FX) market the index tracks options on currencies of major and developing nations by following aggregate volatility in currencies based on three-month at-the-money forward options of 23 USD-based currency pairs
DefinitionsCorrelation coefficient measures the interdependencies of two random variables that range in value from minus1 to +1 indicating perfect negative correlation at minus1 absence of correlation at 0 and perfect positive correlation at +1
Price-to-Earnings (PE) ratio is the ratio of a companyrsquos current share price to its current earnings typically trailing 12-months earnings per share A Forward PE calculation will typically use an average of analystsrsquo published estimates of earnings for the next 12 months in the denominator Excess return is the amount by which a portfoliorsquos performance exceeds its benchmarknet (in the case of the analysis in this article) or gross of operating expenses in percentage pointsOption-Adjusted Spread (OAS) is the measurement of the spread between a fixed-income securityrsquos rate and the risk-free rate of return which is adjusted to take into account any embedded optionsThe Chartered Financial Analystreg (CFAreg) designation is offered by CFA Institute To obtain the CFA charter candidates must pass three exams demonstrating their competence integrity and extensive knowledge in accounting ethical and professional standards economics portfolio management and security analysis and must also have at least four years of qualifying work experience among other requirementsThird-party marks are the property of their respective owners all other marks are the property of FMR LLCFidelity Institutional Asset Managementreg (FIAMreg) provides registered investment products via Fidelity Distributors Company LLC and institutional asset management services through FIAM LLC or Fidelity Institutional Asset Management Trust CompanyPersonal and Workplace investment products are provided by Fidelity Brokerage Services LLC Member NYSE SIPCFidelity Clearing amp Custody Solutionsreg provides clearing custody or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC Members NYSE SIPC93675010
copy 2020 FMR LLC All rights reserved
47
Slide Number 1
Slide Number 2
Market Summary
Stimulus and Reopening Hopes Spurred Market ReboundThe sharp recovery in prices for riskier assets reflected abundant liquidity and hopeful expectations about reopening after the global shutdown Economic conditions sequentially improved from extremely low levels but progress has been uneven and will largely depend on COVID-19rsquos trajectory and on continued policy support Uncertainty and volatility are likely to remain high thus a well-diversified portfolio may be as important as ever
Dramatic Recovery in Riskier AssetsUS stocks posted their best quarterly results in more than 20 years spearheading a global rally in riskier assets that trimmed year-to-date losses from the Q1 sell-off The decline in credit spreads boosted returns on corporate bonds with longer-duration and higher-quality bonds posting the best year-to-date results Gold benefited from negative real interest rates but commodity prices overall remained laggards
Fast-Moving Stock Prices Too Much Too SoonUS stocks have tended to peak before or during a recession decline amid the recession then bottom and stage a recovery sometime thereafter Compared with other recessionary sell-offs in recent decades 2020 marked the swiftest initial drop as well as the quickest sharpest bounce-back Stocks have recovered so much ground during this recession that they might be pulling forward gains typically earned during the early-cycle phase
Monetary and Fiscal Stimulus Provided Boost to TechnicalsMassive government spendingmdashincluding checks to many households and enhanced unemployment benefitsmdashhelped the personal savings rate to skyrocket in April at a time when many venues where money could be spent remained closed This dynamic prompted a burst of retail-investor stock trading New Federal Reserve facilities for buying corporate bonds served as a welcome sign for borrowers resulting in a record level of new issuance
Real Yields Deeply Negative Inflation Expectations StabilizeUS 10-year Treasury yields remained near record lows held in check by weak economic activity quantitative easing and a global low-yield environment The real cost of borrowing fell deeper into the negative during Q2 offsetting a rise in inflation expectations from depressed levels The most negative real yields in US history occurred during periods of monetary accommodation and higher inflation in the late 1940s and mid-rsquo70s
EconomyMacro Backdrop
Multi-Time-Horizon Asset Allocation FrameworkFidelityrsquos Asset Allocation Research Team (AART) believes that asset-price fluctuations are driven by a confluence of various factors that evolve over different time horizons As a result we employ a framework that analyzes trends among three temporal segments tactical (short term) business cycle (medium term) and secular (long term)
Tentative Economic Stabilization after Historic DeclinesGlobal activity shows early signs of improvement from extremely low levels Near-term sequential progress is likely to continue as coronavirus-related restrictions on routine activities are lifted China appears to be somewhat ahead of most major economies due to its earlier shutdown and reopening While the worst of the recession appears to have passed for the US and Europe as well activity levels remain far below normal
High-Frequency Data Shows Uneven ProgressSince COVID-19 lockdowns sent power demand declining at double-digit rates the path to reopening and recovery has been jagged and varied across countries China experienced the sharpest declines amid the toughest lockdown but has since seen material improvement Europersquos progress appears the most tentative while the US advance seemed to stall during June
China An Industry-Led RecoveryBoosted by government infrastructure stimulus and the move to reopen Chinarsquos industrial production has largely recovered although export-oriented industries still face weak global demand The consumer sector appears mixed with a supportive housing market but an uncertain employment outlook Chinarsquos recovery is slowly gaining traction but additional policy stimulus may be needed to sustain reacceleration
Unemployment Shock Followed by Improvement SupportAfter hitting record levels in March new unemployment claims slowed as the US started to reopen With weekly claims still above 1 million and unemployment above 11 labor markets likely will take time to heal The CARES fiscal package boosted unemployment benefits by $600 per week and raised average incomes for low- and middle-income workers above their pre-virus levels but those extra benefits are set to expire in July
Consumers Expect Improvement but Reopening Is DifficultAs the US economy started to reopen during Q2 consumersrsquo expectations relative to their assessment of then-current conditions improved significantly This trend typically begins during recession and lasts into the early-cycle phase Industries most directly impacted by the virusmdashsuch as travel leisure restaurants and hotelsmdashmay be the most difficult to fully reopen and they account for roughly 20 of US jobs and economic output
Among States ldquoFastrdquo Reopeners Stall US ProgressIn June new COVID-19 cases climbed in states that had quickly relaxed social distancing measures whereas formerly hard-hit states such as New York experienced a decline in new cases High-frequency datamdashsuch as businesses reopened and employee hours workedmdashshowed improvements in US economic activity from historic lows However progress stalled among fast-reopening states and remains far below normal levels
Market Expects a Relatively Quick Earnings Recovery2020 earnings are expected to decline nearly 20mdashabout average for the previous five recessions Consensus estimates are for SampP 500 EPS to return to pre-virus levels by the end of 2021mdasha much faster rate of recovery to pre-recession levels than the historical average of closer to three years Considering the damage to the economy and uncertainty about the path of recovery we believe profit growth may be slower than anticipated
Inflation Drop Likely Short-Lived Consensus Low for LongCore CPI dropped by nearly half in recent months but alternative inflation measures from regional Fed banks fell much less and suggested the biggest disinflation is behind us We expect inflation to remain range-bound in the near term amid a weak economy but longer-term inflation risks may be higher than anticipatedmdashmarket expectations for long-term inflation are lower than they were during the deflationary GFC of 2008
Response May Not Resolve Pre-Existing VulnerabilitiesWhile both the policy response and the market recovery have been dramatic some of the near-term remedies may have exacerbated pre-COVID underlying weaknesses The Fedrsquos emergency lending facilities have driven corporate debtmdashalready at record levelsmdasheven higher In addition gains in financial assets tend to benefit wealthier households but not lower-income tiers which face greater economic distress
Liquidity Injections Exceed Previous Episodes of EasingThe Federal Reserve delivered massive monetary accommodation pushing its balance sheet above $7 trillion by the end of Q2 The Fed ramped up purchases of Treasuries and MBS bought municipal and corporate bonds through new facilities and also provided support via other activities Europe and Japan increased their QE programs with global central banks injecting more than twice the liquidity of previous easing periods
Unprecedented Fiscal Response Will Likely Need MoreBy May the federal government had approved roughly $3 trillion of emergency funds which provided a crucial bridge to economic activity during the shutdown but also ballooned the fiscal deficit to roughly 18 of GDP Amid a slow reopening and severe budget shortfalls at the state and local government level ongoing federal support may be needed to avoid a significant fiscal drag on the economy similar to the post-GFC expansion
USndashChina Tensions Spur De-Globalization PressuresThe deepening USndashChina geopolitical rivalry makes broader agreement on bilateral commercial issues less tractable and raises the risk that flashpoints will lead to escalation Policy actions in 2020 may be relatively contained but the COVID-19 aftermath could lead to a medium-term rise in industrial policies aimed at self-sufficiency more restrictive travel and immigration and continued bipolarization of the global IT industry
Outlook Market AssessmentFidelityrsquos Business Cycle Board composed of portfolio managers responsible for a variety of global asset allocation strategies believes that policy actions are playing a larger role in driving economic and market expectations than they have in the past Board members hold a wide range of views but they emphasize the need for a disciplined investment strategy and some see opportunities within non-US asset categories
Asset Markets
Sharp Recovery from Q1 Losses across CategoriesAlmost all asset categories posted strong Q2 recoveries from their steep Q1 declines Returns for most equity categories remained negative on a year-to-date basis but US growth and technology stocks moved into positive territory Riskier credit segments such as emerging-market debt and leveraged loans led during Q2 but longer-duration and higher-quality bonds remained ahead and in positive territory for the year
Business Cycle Important but Dissipates in the Long RunThe business cycle can be a critical determinant of asset performance over the intermediate term Stocks have consistently performed better earlier in the cycle whereas bonds tend to outperform during recession While we believe a business cycle approach to actively managed asset allocation can add value portfolio returns are expected to even out over the long term (gt10 years) regardless of the starting point of the cycle phase
Expectations Are for Global Earnings Growth to ImproveEarnings growth across all regions continued to slide during Q2 with trailing profit growth in US non-US developed and emerging markets all deep in contraction Forward estimates however point to market expectations of a recovery in earnings growth over the next 12 months led by EM moving back into positive territory
Equity Valuations Back to Pre-Pandemic LevelsThe rally in stock prices and decline in earnings drove global equity valuations higher during Q2 back near their early 2020 levels The rise in price-to-earnings (PE) ratios was broad-based across regions with the US and emerging-market PE ratios finishing the quarter above their long-term historical averages US forward PE ratios also are elevated but EM forward valuations remain below their long-term norm
Slide Number 29
Inflation Protection Remains InexpensiveMarket expectations for inflationmdashrepresented by breakeven rates for TIPSmdashclimbed from decade-low levels but remain at the low end of their historical range Oil prices recovered during Q2 but remain below pre-virus levels and also on an inflation-adjusted basis low relative to history Unlike valuations for many other asset classes prices among inflation-resistant asset categories remain relatively inexpensive
Business-Cycle Approach to Equity SectorsA disciplined business-cycle approach to sector allocation seeks to generate active returns by favoring industries that may benefit from cyclical trends Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion Meanwhile companies in defensive sectors with relatively more stable earnings growth have tended to outperform in recession
Slide Number 32
Tighter Spreads Pushed Bond Yields to Record LowsAfter a steep rise last quarter credit spreads tightened during Q2 but remained elevated relative to their long-term averages Massive central bank accommodation in both the Treasury and credit markets put downward pressure on both rates and spreads helping push bond yields in high-quality debt categories down to their lowest levels on record
Long-Term Themes
Performance Rotations Underscore Need for DiversificationThe 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 yearmdasheven among asset classes that are moving in the same direction A portfolio allocation with a variety of global assets illustrates the potential benefits of diversification
Slide Number 36
Secular Rising Policy and Political RiskWe believe the longstanding global regime of relatively stable and investment-friendly policies politics and regulation is nearing an end Rising populism geopolitical destabilization and de-globalization pressures are key drivers of this change We expect greater government intervention may inhibit corporate profitability distort market signals and lead to higher political risk in investment decisions throughout the world
Demographic Deterioration Exacerbates Fiscal PressuresFor most advanced economies deteriorating demographic trends will only get worse in coming decades with fewer new workers to support a growing number of retirees This creates even greater fiscal pressure due to rising spending on pensions and health care The already elevated levels of government debtGDP are likely to rise much further with some major economies on pace to surpass the highest debt levels ever recorded
Secular Trend De-GlobalizationAfter decades of rapid global integration economic openness stalled in recent years amid geopolitical shifts and domestic political pressures in many advanced economies This poses risks for countries industries and companies that benefited most from the rise of a rules-based global order The more that domestic politics and location matter the greater the benefits and active opportunities from global asset diversification may be
Unintended Consequences of Extraordinary Monetary PolicyOver the past decade global central banks have continued to use extraordinary monetary accommodation These policies have had mixed and unintended effects on the global economy including increased risk in financial systems deflationary impulses and a weak consumer response With many investors having grown accustomed to routine intervention central banks may find it increasingly difficult to normalize their policies
Rising Debt Will Policy Response Be InflationaryThe dramatic worldwide rise in public and private debt in recent decades is a reflection of monetary and fiscal policymakersrsquo proclivity to use low interest rates and government support to attempt to boost growth rates While technology and other factors have kept inflation in check we believe greater policy experimentation and ldquopeak globalizationrdquo trends will eventually cause long-term inflation to rise faster than expected
Market Downturns Can Cause Investors to De-RiskData from millions of retirement-plan participants illustrates how investor behavior can change under varying market conditions During past bear markets many long-term investors reduced their equity allocation and then took years to ramp back up to their prior equity-contribution rates Excessive focus on short-term market volatility may hamper the ability to achieve the objectives of a sound diversified long-term investment plan
Myopic Loss Aversion Prompts Risk-Averse BehaviorMyopic loss aversion describes a common bias in which greater sensitivity to losses than to gains is compounded by the frequent evaluation of outcomes Historically investors who review their portfolios more frequently have tended to shift toward more conservative exposures as increased monitoring raises the likelihood of seeing (and reacting to) a loss
