Four important factors -- economic momentum, monetary stimulus,
technical conditions, and investor sentiment -- have converged to create
a sweet spot for U.S. stocks. A new thought leadership report from
Fidelity Investments, titled “Can
the Sweet Spot for Stocks Continue,” analyzes whether the U.S.
equity market can continue to gain strength.
“The U.S. stock market has been on a tear since the end of last year,”
said Jurrien Timmer, co-portfolio manager of Fidelity
Global Strategies Fund and director of Global Macro for Fidelity’s
Global Asset Allocation division. “The rally has been impressive, with
the Dow up about 1,000 points so far this year -- and back above its
all-time closing high of 14,164.53 set on October 9, 2007. The S&P 500®
Index is about 25 points shy of its all-time closing high of 1,565.15.
“While I believe the U.S. equity market could continue to gain strength,
there are risks on the horizon, including China’s overheating credit
boom, rising gasoline prices, technical divergences, and spread product
liquidity,” continued Timmer.
According to Timmer, the recent rally has been robust because four
important factors have converged: Economic momentum has improved,
monetary stimulus was stepped up -- yet again, the “tape” (the market’s
technical condition) has been very strong, and investor sentiment has
turned around. The new report reviews each one of these factors.
Factor 1: Economic momentum has improved. There is no question
that the United States, and, indeed, the global economy, has improved
in recent months. While U.S. GDP actually shrank slightly in the
fourth quarter (–0.1%), several other economic indicators have been
pointing in the opposite direction, such as the Purchasing Managers
Index (PMI). Elsewhere in the world, there has been improvement as
well. For instance, China’s manufacturing PMI has rallied.
Factor 2: Monetary stimulus was stepped up -- yet again. Do not
underestimate the power of central banks to inflate asset prices. This
is, after all, the intended purpose of QE (Quantitative Easing). While
some of the market’s recent momentum is the result of a better
economy, as well as reduced fiscal cliff fears, the market has been on
a sugar high delivered by the Fed’s latest round of QE, and now also
by the prospect of an important regime shift at the Bank of Japan.
This has raised the “valuation” of equity prices relative to the
underlying economic fundamentals. That’s fine as long as the momentum
keeps going, but it creates the risk that when the music finally
stops, the market could be exposed to downside risk.
Factor 3: The “tape” has been very strong. The tape refers to
the market’s technical condition, including breadth (i.e., the ratio
of advancing to declining issues) and momentum. Both have been very
strong and this has created an important pillar of support for stocks.
For the most part the tape remains pretty strong. It seems as though
the all-time highs of 2000 and 2007 (at 1,550 and 1,575, respectively)
are acting like a magnet for the S&P 500, and it wouldn’t be a
surprise if those levels are tested or even exceeded in the coming
Factor 4: Investor sentiment has turned around in a big way.
Has the “great rotation” started? This is what a lot of strategists
are wondering. The great rotation is the name given to the prospect
that investors will finally start to rotate out of bonds into
equities, which they have been shunning since the stock market peak in
October 2007. If a major shift is underway, it could be big enough to
propel stocks higher for many months. If that happens, we could indeed
be at the beginning of a new secular bull market for stocks.
“All in all, I see a stock market that could well continue to gain
strength in the coming weeks, but there are enough risks on the horizon
to warrant maintaining a balanced portfolio,” said Timmer. “That means
having enough equities to participate in the rally, while also having
enough bonds to provide diversification.”
Fidelity has authored a number of thought leadership reports over the
past couple of months that discuss the state of the U.S. equity market
and why investors should consider allocating more to equities as part of
a diversified portfolio. Some of these reports include:
About Fidelity Investments
Fidelity Investments is one of the world’s largest providers of
financial services, with assets under administration of $4.0 trillion,
including managed assets of $1.7 trillion, as of January 31, 2013.
Founded in 1946, the firm is a leading provider of investment
management, retirement planning, portfolio guidance, brokerage, benefits
outsourcing and many other financial products and services to more than
20 million individuals and institutions, as well as through 5,000
financial intermediary firms. For more information about Fidelity
Investments, visit www.fidelity.com.
Before investing, consider the funds investment objectives, risks,
charges and expenses. Please visit www.fidelity.com
or advisor.fidelity.com for a prospectus or if available, a summary
prospectus, containing this information.
Diversification does not ensure a profit or guarantee against loss.
The S&P 500 and S&P are registered service marks of The McGraw-Hill
Companies, Inc., and are licensed for use by Fidelity Distributors
Corporation and its affiliates. The S&P 500 Index is an unmanaged
market–capitalization weighted index of common stocks.
The Dow Jones Industrial Average is an unmanaged index of common stocks
comprised composed of major industrial companies and assumes
reinvestment of dividends.
The Purchasing Managers Index (PMI) is a survey of purchasing managers
in a certain economic sector. A PMI over 50 represents expansion of the
sector compared with the previous month, while a reading under 50
represents a contraction, and a reading of 50 indicates no change. The
Institute for Supply Management (ISM) reports U.S. PMIs; Markit compiles
Stock markets, especially foreign markets, are volatile and can decline
significantly in response to adverse issuer, political, regulatory,
market, or economic developments. ETFs may trade at a discount to their
NAV and are subject to the market fluctuations of their underlying
In general, the bond market is volatile, and fixed income securities
carry interest rate risk. (As interest rates rise, bond prices usually
fall, and vice versa. This effect is usually more pronounced for
longer-term securities.) Fixed income securities also carry inflation
risk and credit and default risks for both issuers and counterparties.
Unlike individual bonds, most bond funds do not have a maturity date, so
holding them until maturity to avoid losses caused by price volatility
is not possible.
Past performance is no guarantee of future results.
Fidelity Investments and Fidelity are registered service marks of FMR
Fidelity Brokerage Services LLC, Member NYSE, SIPC
Street, Smithfield, RI 02917
Fidelity Investments Institutional Services Company, Inc.,
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