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KEY TAKEAWAYS
leadership series
S&P 500
9.0%
6.5%
Energy Sector
3.5%
0.5%
2.5%
Dec-2012
Mar-2013
Jun-2013
Sep-2011
Dec-2011
Mar-2012
Jun-2012
Sep-2012
Dec-2010
Mar-2011
Jun-2011
Sep-2013
Dec-2013
Mar-2014
Jun-2014
Sep-2014
Dec-2014
Mar-2015
Jun-2015
Sep-2015
5.2%
5.5%
Mid
Late
commodity-dependent economies, as well as toward mollifying recessionary pressures in other emerging markets,
such as Brazil and Russia (see Macro Update/Global).
An outright reversal of recent global trends does not
appear imminent, but our view is that we may be
approaching the final innings of sharp declines in commodity prices, emerging-market economies, and nonU.S. currencies.
Asset allocation implications of a muddle-through
scenario for the global economy
Should our base-case scenario for the global economy play
out, the following are some asset allocation considerations to
keep in mind:
Favor equities over bonds for an eventual reassertion of
U.S. mid-cycle trends
Expect elevated volatility
Maintain relatively small asset allocation tilts
A dramatic spike in interest rates remains unlikely
Late-cycle risks may rise as year progresses
The U.S. remains in a steady mid-cycle expansion as we
highlighted above, and near-term, late-cycle risks remain
generally low. However, if our base-case scenario plays out
China stabilizes and the global economy muddles through
we anticipate that the odds of the U.S. transitioning to a
late-cycle phase may rise as the year progresses. As a result,
the following are some factors we expect to be monitoring
closely before the end of 2016.
1. Late-cycle phases generally feature rising inflation
14%
12%
10%
8%
6%
4%
2%
0%
Commodity Prices
Wages
Fidelity Investments proprietary analysis of historical commodity performance, using data from BP Statistical Review of World Energy 2015, U.S.
Department of Agriculture, U.S. Geological Survey, and U.S. Foreign Agricultural Service. Wages = Average Hourly Earnings. Source: Bureau of Labor
Statistics, Haver Analytics, Fidelity Investments (AART), as of Oct. 31, 2015.
leadership series
Headline
5%
Energy
10%
15%
Nov-15
Aug-15
May-15
Feb-15
Nov-14
Aug-14
May-14
Feb-14
Nov-13
Aug-13
May-13
Feb-13
20%
Core
0%
3-month average
25%
600
20%
500
15%
400
10%
300
5%
200
0%
Nov-95
Nov-96
Nov-97
Nov-98
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Source: Department of Labor, National Federation of Independent Business, Haver Analytics, Fidelity Investments (AART), as of Nov. 30, 2015.
leadership series
70%
60%
50%
40%
30%
20%
Jul-15
Sep-15
Mar-15
May-15
Jan-15
Nov-14
Jul-14
Sep-14
May-14
Jan-14
Mar-14
Nov-13
Jul-13
Sep-13
Mar-13
May-13
0%
Jan-13
10%
EARLY
MID
LATE
RECESSION
Growth peaking
Growth moderating
Falling activity
Credit tightens
Credit dries up
Profits decline
Policy neutral
Policy contractionary
Policy eases
CONTRACTION
Germany U.S.
Japan
+
Economic Growth
RECOVERY
EXPANSION
China#
Relative Performance of
Economically Sensitive Assets
Green = Strong
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 countrys long-term economic potential. We have adopted the growth cycle 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 the most for asset returns. We use the classic definition of recession, involving an outright contraction in economic activity, for developed
economies. Please see endnotes for a complete discussion. Source: Fidelity Investments (AART).
leadership series
AUTHORS
Dirk Hofschire, CFA l Senior Vice President, Asset Allocation Research
Joshua Lund-Wilde, CFA l Research Analyst, Asset Allocation Research Jake Weinstein, CFA l Senior Analyst, Asset Allocation Research
The Asset Allocation Research Team (AART) conducts economic, fundamental, and quantitative research to develop asset allocation
recommendations for Fidelitys portfolio managers and investment teams. AART is responsible for analyzing and synthesizing investment
perspectives across Fidelitys asset management unit to generate insights on macroeconomic and financial market trends and their
implications for asset allocation.
Asset Allocation Senior Research Analyst Jordan Alexiev, CFA; Senior Analyst Austin Litvak, CFA; Research Analyst Ilan Kolet; and Analyst
Caitlin Dourney also contributed to this article. Fidelity Thought Leadership Vice President Kevin Lavelle and Thought Leadership Director
Christie Myers provided editorial direction.
The Business Cycle Framework depicts the general pattern of economic cycles throughout history, though each cycle is different; specific commentary
on the current stage is provided in the main body of the text. In general, the
typical business cycle demonstrates the following:
During the typical early-cycle phase, the economy bottoms out and picks
up steam until it exits recession then begins the recovery as activity accelerates. Inflationary pressures are typically low, monetary policy is accommodative, and the yield curve is steep. Economically sensitive asset classes