The Equity Market Could Continue to Gain Strength, but There Are Risks,
According to New Thought Leadership Report from Fidelity®
Fidelity Portfolio Manager Jurrien Timmer Reviews 4 Key Factors That Have
Created a “Sweet Spot” for Stocks in Recent Months
BOSTON -- March 6, 2013
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
“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,”
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 weeks.
*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
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:
*Is loss aversion causing investors to shun equities?
*Are we at the end of the secular bear market for stocks?
*Good climate for stocks
*Danoff on 2013: Time for stocks
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.
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