Why U.S. Market So Strong?
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•
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Oversold early ‘09
U.S. almost only decent economic region
Unusual monetary/interest rate environment
Profits growth much better than revenues
Goldilocks economy
Economic & Markets Outlook?
How Do We Make the Best of…
SLOW
C. Bruce Johnstone
Managing Director, Fidelity Investments
Former Chief Investment Officer
Fidelity International Ltd.
Fidelity Investments
245 Summer Street
Boston, MA 02210
How Do You Compare Investment
Opportunities Around the World?
Stock Markets
Rising
Corporate
Earnings
Benign
Inflation/
Interest Rates
and Ample
Liquidity
Reasonable
Valuations
U.S.
Stock Markets
Rising
Corporate
Earnings
Benign
Inflation/
Interest Rates
and Ample
Liquidity
Reasonable
Valuations
Weakest U.S. Recovery Since the 1930s
Change in nonfarm payrolls
1%
1980
1981 1990
Dec. 2007 to
May 2014
2001
0%
-1%
-2%
-3%
-4%
-5%
-6%
0
1
2
3
Years since the recession began
Adjusted to reflect seasonal and census hiring.
Source: U.S. Labor Department, the Wall Street Journal, as of 12/31/2014.
4
5
6
Why Poor Economic Rebound?
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•
•
•
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Unfunded Entitlements à Rising Savings Rate
Labor Held Back
Government Intrusion
Health Insurance Uncertainty
Worldwide Slowdown
Debt
EPA/OSHA: Wait…
Internet Uncertainty?
Low Productivity
REGULATION NATION?
Number of Economically Significant Regulations
150
120
90
60
1995
1999
2003
Source: Unified Agenda, Regulatory Information Service Center as of 12/31/2014.
2007
2011
2015
Affordable Care Act
So simple, a child prodigy
could understand it…
Understated Unemployment
Millions of People on Disability
12
10
8
6
4
2
0
1967
1977
Source: Bianco Research LLC, as of 12/31/2014.
1987
1997
2007
2014
Rising Corporate Earnings
Strengths:
Weaknesses:
Monetary Ease
Sluggish Inflation (Gasoline)
Consumer Balance Sheet
Automation / Labor Slack
BUYBACKS
Interest Rates Stay Low?
Average Auto Age
Consumer Savings Rising
Profit Margins near High
Strong Dollar?
Oil Price Collapse?
Europe, Japan, and Developing Nations
Government Intrusion
Up to Eyeballs in Debt
“Ransomware”
There’s Lots of Good Stuff…
Central Banks’ Gusto
Shale Oil / Natural Gas Breakthrough
Debt Service Burden Low
Crowdfunding Works
Leading Indicators & U.S. Economic Outlook OK
American Optimism… Ability to Adjust
Japan Reinvigoration?
Is the U.S. Consumer Improving?
(70% of GDP)
Questionable…
• House Prices Still Down 10-15%
• Unemployment (Part-Time / Automation)
• Cash Wages Stalled
• Credit Tight
• Taxes Up
• ACA Fees / Mandated Benefits
• 80-90% of Consumers Lagging
Improving…
• Inflation Still Low
• Job Openings
• 2015 Wage Outlook
• Sustainable Wealth Reversal?
• Debt Service Burden Low
• Time Passes, Consumers Adjust
There’s the Not So Good…
Sluggish Worldwide Growth / Currency Wars
Regional Conflicts
China, Russia Slowing/Menacing
Federal Debt / Unfunded Entitlements
Divided U.S. Electorate
Aquifers Running Dry
Cyber Hackers
Inappropriately Educated Workforce
Woeful Infrastructure
Extended Profit Margins
S&P 500 Net Margin (4-quarter average)
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
1963
1971
Source: FactSet, as of 10/31/2014.
1979
1987
1995
2003
2012
Strong Dollar Consequences…
The Dollar Index
94
92
90
88
86
84
82
80
78
76
74
72
2011
Source: Bianco Research, as of 1/7/2015.
2012
2013
2014
Sector Collapse?
Crude Oil (WTI)
115
105
95
85
75
65
55
45
35
2010
2011
Source: FMRCo and Bloomberg, as of 5/7/2015.
2012
2013
2014
2015
Europe Struggles
Industrial Production
115
110
United States
105
100
95
Eurozone
90
85
2005
2007
September 2005 = 100. Source: Bianco Research LLC, as of 10/30/2014.
2009
2011
2013
2014
China’s Property Bubble: Game Over? Or Just Slowdown?
Prices per Home (Multiple of Income) at Bubble Peaks
25x
20x
23
15x
13
10x
5x
5
0
China, 2013
(Median size
645 sq. ft.)
Source: NBS, Haver Analytics as of 12/31/2014.
Japan, 1991
(Median size
1,200 sq. ft.)
U.S., 2008
(Median size
2,200 sq. ft)
China: Vacant Floor Space of Residential Buildings
% Change – Year to Year
80
60
40
20
0
-20
2008
2009
2010
YTD data. Source: China National Bureau of Statistics, Haver Analytics as of 11/26/2014.
2011
2012
2013
China Summary
Growth Engine Stalling…
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Property Bubble
Infrastructure Bubble?
Anti-corruption, Anti-“excess,” Anti-monopolies
Pensions Black Hole
Pollution
Demographic Dilemma
American Debt…
Borrowing From the Future…
Total Credit Market Debt as a % of GDP
370
320
%
270
220
170
120
1922
1931
1940
1949
Source: Ned Davis Research, Inc., MacroMavens, as of 12/31/2014.
1958
1967
1976
1985
1994
Domestic non-financial debt represented 99.4% of total credit market debt
2003
2014
Out of Control?
Total Federal Debt to GNP/GDP
120%
100%
80%
60%
40%
20%
0%
1791
1821
1851
1881
1791 to 1928: GNP. 1929 to 2014: GDP. Source: Bianco Research LLC, as of 12/31/2014.
1911
1941
1971
2001 2014
…Doesn’t Include Fannie Mae and Freddie Mac,
Possible Interest Cost Increases, or…
Unfunded Entitlement Obligations ($TN)
80
70
60
50
40
30
20
10
0
76.4
17.8
Public Debt
Source: Strategas Research Partners, as of 11/3/2014.
Future Entitlement Shortfall
(Net Present Value)
Going Bankrupt
Trust Fund Balances as a Percentage of Expenditures
400%
Social Security
Retiree Benefits
350%
300%
Social Security
Disability
250%
200%
150%
100%
Medicare
50%
0%
1990
2000
2010
2020
Source: Social Security and Medicare Boards of Trustees reports, and the Wall Street Journal, as of 8/6/2014.
2030
2035
Earnings Growth:
Big Cyclical Rebound… Then… Sluggish Growth?
After-tax corporate profits*
(ratio scale, billions of dollars, saar)
1940
1700
1480
1220
980
740
500
58
5%
280
10%
280
20
7%
1940
1700
1480
1220
980
740
500
62
66
70
74
78
82
86
90
94
98
*Excludes IVA & Ccadj, and write-offs. Growth paths are compounded monthly to yield 5%, 7% and 10% annual rates.
Source: Yardeni, as of 3/31/2015.
02
06
10
15
20
Benign Inflation / Interest Rates / Ample Liquidity
Positives:
Risks:
Global Slowdown
U.S. Energy Independence
Smaller, Cheaper Tech
Strong U.S. Dollar
Central Banks’ Printing
Interest Rates Lowww
Ample Labor
Worldwide Growth To Improve
“Artificial” (Suppressed) Interest Rates
U.S. Budget Deficit to Grow
Central Bankers Print Too Much?
Is It All About the Fed?
The Federal Reserve’s Balance Sheet
4.5
Trillions of Dollars
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0
1980
1985
Source: Bianco Research, as of 3/31/2015.
1990
1995
2000
2005
2010
2014
From 5¢ Cokes to $5 Lattes
Purchasing Power of the Dollar (1933-2014)
81 years (1933-2014) purchasing power of USD down 97%
2.50
2.00
1.50
1.00
0.50
0.08
1933
1943
1953
Source: Bloomberg Seeking Alpha, as of 12/31/2014.
1963
1973
1983
1993
2003
2014
Secular Outlook: Low Inflation?
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Technology / Productivity
Big Debt Everywhere
Global Competition
Overcapacity / China SLOWING
Internet
Frothy?
U.S. Stock Market Capitalization as % GDP
210
170
150
110
70
30
1958
1972
Source: BEA, Federal Reserve, as of 12/31/2014.
1986
2000
2014
Reasonable Valuations
Positives
Risks
Monetary Ease
Low Inflation
Low Interest Rates
Strong U.S. Dollar
Buybacks / Privatizations
High P/E on Peak Margins?
2015 Rate Rise?
Political Brinkmanship / Regulation
Sales/Earnings Growth Momentum
World Event Risk
Let’s Look at the Numbers…
Then & Now:
August 1982 vs. May 2015
Fed Funds Rate
10 Year UST Yield
Trailing S&P 500 P/E
Price to Book
Dividend Yield
Top Marginal Tax Rate
Capital Gains Tax Rate
Source: Strategas Research Partners, as of 5/7/2015.
August ‘82
10.25%
13.6%
8.8 x
1.0 x
6.6%
50%
20%
Current
0.13%
2.2%
18.8 x
2.8 x
1.9%
39.6%
23.8%
Compare the Markets
(Current Fundamentals Not As Bad)
2008
• Leveraged Financial System
• Home Price Bubble Collapse
• Financial Contagion
• Stock Market Crash
• Governments in Rescue Mode
• Natural Gas $14
2015
• Balance Sheets Better
• Home Prices Rising
• Fear of Contagion
• Stock Market Rally
• Monetary Policy More Supportive
• Natural Gas $2.50
Relative Prices of Energy
Energy Equivalent Prices ($ per MMbtu) – U.S.
$20
$15
$16
$12
$9
$8
$4
$10
$11
$6
$2.50
$Natural Gas
Source: EIA, Bloomberg, as of 4/13/2015.
Ethane
WTI Oil
Brent Oil
Propane
NAPHTHA
World Event Risk
Potential Disasters
Possible Successes
Russia / Ukraine / Europe / Nuclear Agreement
“Grexit”
ISIS: Iraq / Syria / Lebanon / Jordan
Iran
China / Neighbors Disputes
Yemen / Africa
A Weakened Kim Jong-un: Brinksmanship?
Disenfranchised Bahrain / Saudi Succession: Meltdown?
The Media
Israel / Palestine
Afghanistan
Pakistan / India
Venezuela
Cultural Mistrust / Cheating / Spying / Fear
U.S. Health Care Shortages
Cyber Warfare / Laser Warfare Weaponry
South African Labor Strife
Decentralized / Dispersed Technology / Unlimited Information
Pollution / Ag Chemicals / Killer Weeds / Dead Water Zones
Latin Confiscation
Civilian Airliners Threatened
Rising Markets
Docile Gasoline
Housing / Autos
Eurozone?
Japan
Mexico
Taiwan / China
Colombia / Brazil
Israel / Palestine Talks
U.S. Natural Gas / Shale Oil Potential
Iran
North Korea
MEFTA
India / Pakistan
Charles / Camilla
William / Kate
Greece
Thorium / Graphene / Vanadium
IRA / Northern Ireland
Afghanistan
Middle East Democracy
Revitalization of the U.S. Economy:
How Do We Get There?
• Less Uncertainty!
• More Confidence!
• Incentives!
Specifically…
• Let’s Brainstorm
• Let’s Educate
• Let’s Change Piecemeal, Incrementally
(Humans are Not Hardwired for Radical/Elaborate Change)
Brainstorm: Make the Private Sector Soil “Fertile”
(Incentives for Growth, Anyone?)
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Index Social Security to prices, not wages
Raise the retirement age
Auction U.S. citizenship/green cards for grads/more for China, India
Tax reform: flat/corporate/carbon/VAT/dividends/capital gains/deductions?
Free-market pricing of water
Scrap “prevailing wage” laws
Develop comprehensive energy policy (natural gas / solar)
Tort reform/insurance across state lines
Source: Strategas Research, as of 4/13/2015.
Brainstorm: Instructions to Washington…
“Get the Country Moving Again”
(Openness / Productivity of Federal Government)
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Have family (including kids) dinners with the opposition, monthly bipartisan gatherings
Up or down vote on presidential appointments in 90 days
Ability to override a committee chair who sits on a bill (also amendments)
Synch House and Senate schedules with 3 (5-day) workweeks in D.C. and one at home
Overhaul electoral college
Public question times for the President
Immigration: Make it easier to come and go, not harder
GAAP accounting – FOR GOVERNMENTS
Incentives for infrastructure revitalization
Revamp War on Drugs
Source: Yardeni/Parade Magazine, as of 4/13/2015.
Brainstorm: More Instructions to Washington
(More Incentives to Grow the Country?)
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Continue reorg of K-12, with “competition” and “choice” the key ideas
Support for education in science, technology, engineering, math
Kill crop/ethanol subsidies
Require regulators to do cost analyses / sunset clauses in all regulations
Praise the job creators, stop demonizing them
Greater use of earned income tax credit, not minimum wage
Consumer must “feel” the cost of healthcare / fees for healthy outcomes
Have D.C. folks subject to our laws/regs – not theirs
Harden the national electric grid
Everybody has to sacrifice
Source: Strategas Research, as of 8/12/2014.
How to Cope?
Income & Growth
Inflation-Adjusted Return OK
Growth
Underpriced Assets Other
• Capital & Income Fund
• Solar
• Early Venture Capital
• Borrow!
• New Markets Income Fund
• Int’l Cap App
• Private Equity
• Residential RE
• Convertible Securities Fund
• Water / Ag Plays
• Europe?
• Financials?
• Stem Cell Tech
• Emerging Markets?
• Global E/I
• Pacific Basin Fund
• Natural Resources?
• Option Writing?
• Int’l Small Cap Opps
• Quality Stocks
• Muni Bonds?
• Energy Infrastructure
• Short JGBs
• Small Cap Value
• Cyber Security / Drones / AI
• North Korea
• Leveraged Company Stocks
• Video Production
• Genome Sequencing
• Small Cap Discovery
• VIX Calls
Global Breadth Means Identifying Better Opportunities
Leveraging the work of over 400 research professionals around the globe*
North America
163
88
GLOBAL ASSET
ALLOCATION
SPECIALISTS
EQUITY
SPECIALISTS
61
FIXED INCOME
SPECIALISTS
25
HIGH INCOME
SPECIALISTS
Europe
2
32
13
HIGH INCOME
FIXED INCOME
SPECIALISTS
EQUITY SPECIALISTS
SPECIALISTS
Pacific
ex-Japan
10 29
Japan
8
EQUITY
SPECIALISTS
EQUITY
GLOBAL SPECIALISTS
ASSET
ALLOCATION
SPECIALISTS
*Research professionals include research analysts and associates as of 12/31/2014 and reflect the combined resources of Pyramis and Fidelity Investments.
Active vs. Passive: Industry Averages Are Misleading
Well-resourced firms with low fees outperform the indexes and passive funds
Basis Points of Excess Return
AVERAGE INDUSTRY ONE-YEAR EXCESS RETURNS, NET OF FEES
U.S. Large-Cap Equity Mutual Funds, 1992–2014
60
Active
Passive
44
40
18
20
5
0
(3)
(20)
(13)
(40)
(36)
(60)
(80)
(16)
(51)
(67)
Unfiltered
Low Fees
Bottom Quartile of Fees
Most Resources
Top 5 Fund Families
Low Fees and Most
Resources
All Fidelity Active
Large Cap Funds
Active vs. Passive: Fidelity Is Not Average!
We have a deep lineup of outperforming managers
$225,000
$200,000
$175,000
$150,000
$125,000
$100,000
$75,000
$50,000
$25,000
$0
1990
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$0
1997
Contrafund ($217,369)
S&P500 ($109,128)
1994
1998
2002
2006
2010
2014
Annualized relative return: 314 bps,
Annualized per year for 24 years
2001
1.80
Low Contra Growth RE
Priced
Co
High
Stock
Inc
Div
Intl
Cap
&
Inc
Lev
Co
Stock
2013
Inl
Disc
Lg
Cap
Stk
Cap Worldwide Sm
App
Cap
Disc
Low-Priced Stock ($301,973)
R2000 ($106,713)
1995
2000
2005
3.54
New
Mill
2010
Annualized relative return: 462 bps
Annualized per year for 25 years
2.58
2.09 2.04 2.51 2.45
1.18 1.43 1.14 1.17
1.03
2009
4.33
3.65
3.14 3.56
2005
Annualized relative return: 356 bps
Annualized per year for 17 years
4.87
4.62
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$0
1990
Growth Company ($59,568)
R3G ($33,002)
1.92 1.47
1.11
Indep. Focused Intl
Intl
Em
Intl
Stock Growth Cap EMEA Sm
App
Cap
Opp
Mega
Cap
Stock
OTC
2.70
1.76
Blue Emg
Chip Asia
Growth
Tillinghast
Danoff
Wymer
Rosen
Bower
Notkin
Soviero
Kennedy
Fruhan
Shiel
Kennedy
Myers
Roth
Bertelson
DuFour
Weiss
Simnegar
Kutas
Weiss
Fruhan
Baker
Kalra
Chickles
25 Years
24 Years
18 Years
15 Years
14 Years
11 Years
11 Years
10 Years
9 Years
9 Years
9 Years
9 Years
8 Years
8 Years
8 Years
7 Years
7 Years
6 Years
6 Years
6 Years
5 Years
5 Years
5 Years
Average Annual Outperformance, Excess Return Percent Against Each Fund’s Primary Benchmark, 23 Diversified Equity and High Income Funds with at least 100 bps (1%) of Annual Active Return Over Current
PM Tenure. Source: FMRCo. as of 3/31/2015. Note: VIP, Advisor, Central, Select and Team-managed Funds excluded.
Don’t Short the United States
(America the Beautiful)
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Work Ethic/Resilience/Flexibility/Choice/Mobility
Innovation/Ingenuity/Risk profile (think Silicon Valley)
Capitalistic system fosters competition
Intellectual and financial magnet
Competitiveness (deep/liquid capital markets, rule of law, property rights)
Rehabilitation, not liquidation (via Chapter 11)
Superior infrastructure (shipping, inventory costs)
Accounting transparency
Universities
Lots of natural gas/fresh water
Freedoms (ideas, religion, immigrants)
“Americans can always be counted on
to do the right thing, after they have
exhausted all other possibilities.”
–Winston Churchill
Source: 13D Research, Inc., as of 6/16/2005.
The information presented reflects the opinions of Bruce Johnstone, Managing Director, Fidelity Investments, for Fidelity Institutional Wealth Services as of 5/7/2015.
These opinions do not necessarily represent the views of Fidelity Investments or any other person in the Fidelity Investments organization are subject to change at any
time based upon market or other conditions. Fidelity Investments disclaims any responsibility to update such views. These views may not be relied on as investment
advice and, because investment decisions for a Fidelity Investments fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf
of any Fidelity Investments fund.
Fidelity Institutional Wealth Services, 200 Seaport Boulevard, Z2B1, Boston, MA 02210
Clearing, custody or other brokerage services may be provided by National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC
© 2015 FMR LLC. All rights reserved.
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