“the big conundrum”
TRANSCRIPT
“The Big Conundrum”Investment Themes Fall 2014
FOR INVESTORS
Not FDIC insured. May lose value. No bank guarantee.Not NCUA or NCUSIF insured. May lose value. No credit union guarantee.
Investment Themes Fall 2014
2
Contents
o The U.S. is doing better than you feel
o The rest of the world is doing poorly
o Everyone doing poorly is actually helping the U.S.
3
1985 1989 1993 1997 2001 2005 2009 20130
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
Household Net Worth ($ Billions) 6/30/2014
Since the financial crisis net worth is up over $26 trillion
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 201360
80
100
120
140
160
180
200
S&P/Case-Shi l ler U.S. Na tional Home Price - Index
Higher home prices + Rising Equity Markets = Increased Net Worth
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
S&P 500 - Price Index 10/13/2014
Higher home prices – up 21% from the bottom*
Equity markets setting new highs, up 196%*
Consumer net worth has risen over $26 trillion from the bottom
Source: FactSet. Diagonal lines on charts represent trendlines based on historical performance. Home prices up 21% since the March 2012 low. S&P is up 295% from 3/9/09 – 9/1/14
4
Unemployment recovery finally resembles that of past recoveries
1985 1989 1993 1997 2001 2005 2009 2013
-400
-200
0
200
400
Thou
sand
s
Nonfarm Payrolls 9/30/2014Recession Periods - United States
2001 2003 2005 2007 2009 2011 20131,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
5,500
Job Openings, Thousands, Sa (Jolts) - USA 29-Aug-2014
Level of Current Job Openings in the U.S.
U.S. Nonfarm Payrolls(m/m change)
Source: FactSet.
5
U.S. federal budget deficit has declined and stabilized
Source: Strategas, FactSet
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 202020
30
40
50
60
70
80
90
U.S. Debt as a % of GDP(Congressional Budget Office)
Cbo, Debt Held By The Public, As A Percentage Of Gdp, Percent - United States
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Why things could be getting even better, Reason #1: Abundant energy resources spread across the country
Source: EIA, Citigroup Research
7
Energy already making an impact
2000 2002 2004 2006 2008 2010 2012 20140
200
400
600
800
1,000
1,200
1,400
1,600
1,800
320.00
1609.00
Baker-Hughes Rotary Rig Count, Oil - United States
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
UnitedStates
SaudiArabia
Russia China Canada UAE Iran Iraq Mexico Kuwait
Country Crude Oil Production as a Percentage of Global Production (2013):
Rising U.S. Oil Rig Count
Source: FactSet (Upper Left & Lower Left). Strategas (Upper Right & Lower Right)
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Why things could be getting even better, Reason #2: Housing rebound continues…
Source: FactSet
1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 20140
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000Supply of Homes for Sale
Foreclosures not Listed (Mrtg. Bnkrs. Assn.; CMSG Estmts.)Total New and Existing Homes for Sale (Census; NAR)
1970 1980 1990 2000 2010
500
1,000
1,500
2,000
2,500
THO
USA
ND
S
956.00
1452.41
U.S. Housing Starts (Seasonally Adjusted)
Total Housing Starts, Seasonally Adjusted 8/29/2014Average
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Why things could be getting even better, Reason # 3: Manufacturing is coming back to the US
-40%
-20%
0%
20%
40%
60%
80%
100%
Chi
na
Can
ada
Italy
Spai
n
Fran
ce
U.K
.
Ger
man
y
Kore
a
Irela
nd
Japa
n
Mex
ico
U.S
.
Countless Examples Across Sectors:
*Official estimates for China not available, but understood to be significantly higher than Canada.
Source: Organization for Economic Cooperation and Development (OECD), Bank for International Settlements, Haver Analytics, FAM (AART) through 12/31/12 (left). ISI, Capital Group, FFAS Capital Markets Strategy Group (right)
Change in Real Unit Labor Costs Since Q1 2002:
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The economy’s position in the business cycle is more important than when the first rate hike comes
Past performance is no guarantee of future results. Asset class total returns are represented by indexes from the following sources: Fidelity Investments, Ibbotson Associates, Barclays, as of Jul. 31, 2014. Source: Fidelity Investments proprietary analysis of historical asset class performance, which is not indicative of future performance. FactSet, Rate Hike Dates – newyorkfed.org
Abs
olut
e A
nnua
l Ret
urn
(Ave
rage
)
Date of First Hike S&P Return (12‐months after first hike)
30-Jun-2004 4.43%30-Jun-1999 4.79%03-Feb-1994 1.88%14-Jul-1988 21.98%
07-Aug-1980 6.85%15-Aug-1977 5.78%01-Jan-1973 ‐17.37%
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• U.S. is doing better than the rest of the world
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U.S. Purchasing Manager’s Index (PMI) stronger than global counterparts and is shining through to corporate earnings
Source: FactSet (Left), BofA Merrill Lynch Quantitative Strategy, MSCI, IBES (Right)
1.01
0.75
0.64
0.4
0.5
0.6
0.7
0.8
0.9
1
1.1
USA ASIA PACIFIC EX‐JAPAN EUROPE
3m Earnings R
evision Ra
tio
Earnings Revision Ratio by Region ‐ Last 3 months(September 2014)
3 month earnings revision ratio
3 month earnings revision ratio ‐ Last month
46
48
50
52
54
56
58
60
United States China EuroZone
Markit Flash PMI Readings(September 2014)
Current One Month Ago One Year Ago
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The U.S. is structurally stronger than Europe and Japan
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Better Demographics: Faster population growth than Europe and Japan
Better Economics: Lower unemployment than Developed Europe
Less debt as a % of GDP than Developed Europe and Japan Faster GDP growth than both.
Source: FactSet
(Right Axis)
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
Real GDP (1‐Yr % chg) Unemployment Rate(%, 6/30)
Govt Debt (% of GDP)
Key Economic Data
United States Europe (developed) Japan
0%
50%
100%
150%
200%
250%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
2012-13 Population Growth Rate
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China says they are growing at 7.5% but foreign trade numbers and real estate prices might put this claim in doubt
2004 2006 2008 2010 2012 2014
-20-20
-10-10
00
1010
2020
3030
4040
4.90
(% 1YR) Foreign Trade, Exports, China (Left)
Source:FactSet (Left), ISI (Right)
Annual Percentage Growth in Chinese Exports
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•The rest of the world doing poorly is actually helping the U.S.
16
Slowdown in global growth has kept a lid on commodity prices and is helping to keep U.S. inflation in check
2012 2013 2014115
120
125
130
135
140
145
150
155
Bloomberg Commodity Index 14-Oct-2014
Source: FactSet
17
Significantly lower yields abroad coupled with a strengthening dollar makes U.S. sovereign debt attractive…
20140
0.5
1
1.5
2
2.5
3
3.5
United States
Japan
Germany
France
Switzerland0.430.48
0.80
1.20
2.20
Sovereign Ten Year Yields(10/14/14)
US Benchmark Bond - 10 Year - Yield Japan Benchmark Bond - 10 Year - Yield Germany Benchmark Bond - 10 Year - Yield France Benchmark Bond - 10 Year - Yield Sw itzerland Benchmark Bond - 10 Year - Yield
Source: FactSet
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Prospects of a further strengthening dollar may attract further flows into the bond and equity markets and keep import prices low
2010 2011 2012 2013 201470
72
74
76
78
80
82
84
86
88
90
- Price 15-Oct-2014
Strengthening dollar (DXY)
Source: FactSet
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U.S. Real Estate bolstered by foreign investors
2010 2014Sales ($bn) % Share Sales ($bn) % Share
Canada 9.4 23% 13.8 15%China 3.3 8% 22 24%Mexico 4.1 10% 4.5 5%India 2.1 5% 5.8 6%United Kingdom 3.7 9% 5.8 6%Brazil 0.4 1% 1.84 2%Russia 1.2 3% 0.92 1%
$41.0 $92.2
Estimate of International Sales from Major Buyers ($ billions)
Source: National Association of Realtors, 2010 & 2014 Profiles of International Home Buying Activity
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Historical patterns also suggesting a potential breakout
1896 1902 1908 1914 1920 1926 1932 1938 1944 1950 1956 1962 1968 1974 1980 1986 1992 1998 2004 20102030405060
100
200300400500600
1,000
2,0003,0004,0005,0006,000
10,000
20,000
Inde
x Le
vel
DJ Industrial Average - Price Index 10/14/2014
Historically, there have been other extended periods of flat returns for equities. If history is any guide, we are likely to be exiting this phase sometime over the next 1-2 years.
Peak to Next Secular Bull: 1929-1942
Peak to Next Secular Bull: 1969-1982 Peak to Next
Secular Bull: 2001-???
Source: FactSet. Past performance is no guarantee of future results.
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•Investment Implications
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U.S. mega & large caps look attractive both historical & absolute basis
1995 1997 1999 2001 2003 2005 2007 2009 2011 20135
10
15
20
25
30
35
14.1414.49AVG: 17.22AVG: 17.05
S&P 100 PE (NTM) - Mega Caps Trading Below Twenty Year Average Fwd P/E
S&P 100 - Price to Earnings Ratio 14-Oct-2014 S&P 500 - Price to Earnings Ratio 14-Oct-2014
Forward PE Valuation favors larger cap
As do earnings growth and dividend yields..
2000‐2013 Mega Caps Mid CapsAnnual EPS Growth (%) 11.3 10.9Dividend Yield (%) 1.5 0.7EPS Growth + Dividend Yield 12.8 11.6Annual Change in P/E (%) ‐1.5 2.5Total Shareholder Return 11.3 14.2
S&P 100
S&P 500
Source: FactSet (Left), Fidelity Investments “Capitalizing on Inefficiencies in Mega-Cap Equities“ (Right)
October 15, 2014 PE (NTM)S&P 100 14.1xS&P 500 14.5xS&P 101‐500 15.2xS&P MidCap 400 15.4xS&P SmallCap 600 16.2x
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Sector Case Study – Energy infrastructure build out is leading to…
Source: U.S. Department of State Final Supplemental Environmental Impact Statement on the Keystone XL Pipeline Project, the Economic and Social Research Institute.
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Re-Industrialization of the U.S.
Source: U.S. Department of State Final Supplemental Environmental Impact Statement on the Keystone XL Pipeline Project, the Economic and Social Research Institute.
25
Current 10-Year yield looks in line with its historic relationship to GDP growth
1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 20130
2
4
6
8
10
12
14
16
18 U.S. 10-Year Treasury Yield vs. GDP Growth (%)
U.S. 10 Year Treasury Yield 9/30/2014 U.S. Nominal GDP (20-Quarter Annualized Percentage Change) 6/30/2014
Source: FactSet
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Yields are low and may stay low for longer than you think.
• After the great depression, it took thirty years for rates to move significantly up
• Supply & Demand Dynamics in play:• A reduction in the deficit and tight
mortgage environment have kept supply low
• Increased number of foreign buyers and compressed yields abroad keep demand high
• Don’t run away from investment grade bonds!
• Yields may stay low for much longer• Only true negatively correlated asset
with equities1916 1925 1934 1943 1952 1961 1970 1979 1988 1997 20060
2
4
6
8
10
12
14
16
18
US Benchmark Bond - 10 Year - Yield 9/30/2014
Source: FactSet
Index of Coincident Indicators. An index published by the Conference Board that is a broad-based measurement of current economic conditions, helping economists and investors to determine which phase of the business cycle the economy is currently experiencing.
Index of Leading Indicators. An index published monthly by the Conference Board used to predict the direction of the economy's movements in the months to come. The index is made up of 10 economic components, whose changes tend to precede changes in the overall economy.
P/E Ratio. A valuation ratio of a company's current price compared to its per-share earnings.
Forward P/E. A measure of the price-to-earnings ratio (P/E) using forecasted earnings for the P/E calculation. While the earnings used are just an estimate and are not as reliable as current earnings data, there is still benefit in estimated P/E analysis. The forecasted earnings used in the formula can either be for the next 12 months or for the next full-year fiscal period.
GDP. The monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.
Index YTW. Index YTW or yield to worst is a yield measure that expresses the worst possible yield based on certain provisions such as prepayment, call, or sinking fund.
Basis Point. One basis point represents one hundredth of one percent. For example, 50 basis points equals 0.5%.
Glossary of terms
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The Russell 1000 Index is an unmanaged index that consists of the largest 1000 companies in the Russell 3000 Index. This index represents the universe of large capitalization stocks from which most active money managers typically select. The Russell 1000 Value and Growth indices comprise of value and growth stocks respectively as determined by Frank Russell & Co.
The Russell MidCap Index is an unmanaged market capitalization weighted index of 800 smallest companies in the Russell 1000 index which represents almost 35% of the total market capitalization. The Russell MidCap Value and Growth indices comprise of value and growth stocks respectively as determined by Frank Russell & Co.
The Russell 2000 Index is an unmanaged market capitalization-weighted index of 2,000 small company stocks. The Russell 2000 Value and Growth indices comprise of value and growth stocks respectively as determined by Frank Russell & Co.
Barclays Capital US Agg. Government-Treasury is an unmanaged index comprising all US Treasury Notes and Bonds having a maturity of at least 1 year.
Barclays Capital Municipal Bond is an unmanaged index of all investment grade municipal securities with at least 1 year to maturity.
Barclays Capital US Aggregate Corporate (BAA) is an unmanaged index composed of all publicly issued, fixed interest rate, nonconvertible, investment grade corporate debt rated BAA with at least 1 year to maturity.
The Merrill Lynch High Yield Master Index consists of fixed-rate, coupon-bearing bonds with an outstanding par that is greater than or equal to $50 million, a maturity range greater than or equal to one year, and a rated single C, but not in default.
JP Morgan EMBI Global is a market value weighted index of US dollar denominated Brady bonds, Eurobonds, traded loans, and local market debt instruments issued by emerging market sovereign and quasi-sovereign entities, covering 27 emerging market countries.
Merrill Lynch US Corps./Real Estate is a market weighted bond index comprised of issuers involved in real estate.
CSFB Leveraged Loan Index is a market weighted index of high yield floating rate US corporate debt instruments.
Merrill Lynch US High Yield Master II is a market value weighted index of corporate bonds publicly issued in the U.S. domestic market that have a rating of less thanBBB3 and at least one year remaining term to maturity.
Barclays Capital US Aggregate is an unmanaged market value weighted performance benchmark for investment-grade fixed rate debt issues, including government, corporate, asset backed, mortgage backed securities with a maturity of at least 1 year.
S&P GSCI Gold is an index tracking changes in the spot price for gold bullion.
GDP is the total value of goods and services produced in the US. Real GDP is GDP adjusted for changes in prices.
The S&P 500 Index is a registered service mark of The McGraw-Hill Companies, Inc. and has been licensed for use by Fidelity Distributors Corporation and its affiliates. It is a unmanaged market capitalization-weighted index of common stocks.
The Dow Jones Industrial Average is a unmanaged price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry and are listed on the New York Stock Exchange.
Index definitions
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