Global Equity Markets in Turmoil Due to Fears About Rising U.S. Interest Rates; Best and Worst Investments in a Highly Volatile Market

Long-term U.S. Treasury yields have been rising in the last four weeks, as traders anticipate the Fed to raise rates possibly as early as June. In addition, the dollar has continued to make impressive gains against all major currencies, as quantitative easing in Europe and Japan is under way.

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The potential for rising interest rates in the U.S. and the steep rise of the dollar has led to a sell off of equities, bonds and commodities around the globe.

The S&P 500 index has retreated from its recent high and now in negative territory for the year. In spite of rising volatility, the chart of the benchmark Fidelity Spartan U.S. Equity Index Fund (FUSEX) shows that the long-term trend for U.S. equities is still bullish:

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Another important development is that commodities and oil continue to deflate, reversing the short-lived rally in January:

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In light of the rising dollar, the bear market in commodities and weak economic conditions in international markets, it is not surprising to see the Fidelity Select Energy Services Fund (FSESX), the Fidelity Select Gold Fund (FSAGX) and the Fidelity Latin America Fund (FLATX) amongst the weakest performers year-to-date:

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The few sweet spots in the current market are sectors that are not sensitive to interest rates and rely on innovation to create growth. Perhaps the most notable is the health care sector, including biotechnology stocks:

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The dynamic interplay of equities, bonds, currencies and commodities is shifting market conditions again. We continue to favor a conservative, risk averse investment approach in 2015.

Read more about investment strategies at FidelitySignal.com

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How can an Aggressive Growth Strategy Beat the Market in 2015

Summary:

  • Global equity markets are “climbing a wall of worry”, in spite of uncertainty about the potential exit by Greece from the Eurozone and geopolitical events in the Ukraine, in the Middle-East and in Latin America.
  • Quantitative easing by the European Central Bank and the Bank of Japan can lead to inflation of financial assets in 2015
  • Low interest rates and much reduced energy costs have started to fuel a new boom in consumer spending in the U. S.
  • The best growth strategy this year may be to diversify between market-leading sectors and emerging investment areas (source: FidelitySignal.com)

Broad market indexes, such as the S&P 500, the Dow Industrial Average and the Nasdaq, are making higher highs again after a treacherously volatile two-month period starting in early December. The good news is that investors have not shied away from risk-on investments, which is very bullish.

The FidelitySignal Aggressive Growth model portfolio can provide an example of how an aggressive asset allocation strategy can work in the current market environment. The asset allocation mix of the portfolio consists of five Fidelity mutual funds. The funds represent investments in both leading sectors and emerging investment areas:

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The FidelitySignal Aggressive Growth model portfolio currently holds positions in market-leading sectors, such as medical delivery, construction and housing, and consumer staples:

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One of the exiting new investment opportunities is materials/chemicals. This sector should continue to benefit from low oil prices and increased demand:

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Southeast Asian economies with strong ties to the Euro market can be great beneficiaries of improved condition in the Euro zone:

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Additional investment strategies are available at FidelitySignal.com

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Is it Time for the Contrarian Bet?

Summary

  • The direction of the financial markets have not really changed that much since late last year, but volatility for U.S. equities is much higher
  • In our view, the risk/reward ratio of taking contrarian investment bets is not favorable right now, but that can change rapidly in the near future
  • A select few sectors are still in a bullish uptrend
  • This is a very dangerous market where increasing the cash allocation seems to be the prudent choice. Sudden and violent moves can happen rapidly in the currency, commodity, equity and bond markets.

Often, the weakest investments from last year can turn out to be the best performers in the next. Since international markets and sectors related to natural resources have fallen tremendously in 2014, it is tempting to take contrarian bets right now and hope to be able to buy close to the bottom. However, whether we like or not, timing can be critical and jumping into a declining investment can have a devastating effect on an otherwise well-balanced portfolio.

When volatility is increasing, it is always useful to take a longer-term view of the direction of the key asset classes. As we can see from the two-year charts below, long-term Treasury bonds are still declining, the dollar is still advancing against a basket of major currencies, and commodities, such as crude oil, are still falling.

Perhaps the most striking feature of these charts is the steepness of the curves. While it is tempting to believe that the direction of the trends is about to reverse in a big way, the reversals have not happened yet, and we simply cannot know if the next rally/sell off will be temporary, or, if it will mark a turn of the long-term trend.

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While the long-term trends for the other three asset classes have not changed yet, U.S. equities have started experiencing increased volatility since November 2014, and now are locked in a trading range. The long-term trend is still up, but the U.S. stock market is on the cusp of rolling over.

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Is it time to buy beaten down stock sectors, such as commodities or gold, or jump into Latin American equities? We think that the risks are too high right now, but would not be surprised to see these investments outperforming the market at one point in the future.

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The Wall Street adage says that there is always a bull market somewhere.  The charts below show a sampling of Fidelity income and equity funds that have done exceptionally well in the recent period, and may continue to outperform:

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Read more about investment strategies at FidelitySignal.com

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Avoid European Stocks Until the Euro Stops Falling

On January 22nd, the European Central Bank announced the start of its Quantitative Easing (QE) program that will involve a larger than expected 60 billion Euro asset purchase per month. The Fidelity Europe Fund (FIEUX) responded with a rally, but it has not yet cleared the resistance level (see blue line on the chart):

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At the same time, the Euro continued to drop against the dollar, which explains why European stocks are less attractive in U.S. Dollar terms:

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The picture is completely different if we look at European equities in Euro terms. This chart shows a very bullish break out:

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Read more about investment strategies at FidelitySignal.com

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Long-Term Bullish Trend is Intact for U.S. Equities, in spite of Increased Volatility; Gold Forms a Bullish Double-Bottom Chart Pattern; It is Still Early to Invest in the Energy Sector or in International Equities;

It is always good to take a look at long-term trends when short-term volatility increases, in order to have a better sense of the market direction. While the widely anticipated stock market correction remains a possibility, in our view, the long-term bullish trend for U.S. equities is still intact.

The chart shows that the multi-year uptrend for the benchmark Fidelity Spartan U.S. Equity Index Fund (FUSEX) has not yet been interrupted by the recent market volatility:

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In a recent article (see Best Fidelity Mutual Funds for 2015) we highlighted the most attractive investments for 2015. The selected mutual funds have continued to perform well in the last few weeks of trading. Especially, conservative sectors, such as real estate, utilities, medical equipment and consumer staples have outperformed the S&P 500 index:

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Perhaps, the most interesting new development in 2015 is the renewed interest in buying gold mining stocks. The chart of the Fidelity Select Gold Fund (FSAGX) below shows a short-term bullish double bottom pattern and increased buying activity during the first two weeks of the New Year. However, gold has a long way to go before it can establish a long-term uptrend.

While gold is traditionally viewed as an inflation hedge, in the current deflationary environment precious metals are looked at as an alternate asset class that can potentially serve as a volatility hedge. We’d like to caution investors, that while gold can provide returns that have low correlation with equities, this sector is highly speculative and is more appropriate for the purposes of short-term trading than long-term investing.

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As noted in earlier articles, we believe that it is still too early to diversify into the weakest sectors, such as natural resources (in particular energy), and into underperforming international markets.

The blue lines on the charts of the Fidelity Select Energy Fund (FSENX) and the Fidelity Latin America Fund (FLATX) indicate that the bearish downtrends that are still in place:

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Read more about investment strategies involving these funds at FidelitySignal.com

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The Best Fidelity Mutual Funds for 2015

Summary:

  • Economic conditions continue to favor real estate investments
  • Municipal income and mortgage securities can provide an alternate source of income for bond investors
  • Style rotation: value investing is likely to outperform growth stocks in 2015, just as small caps have the potential to outperform large caps
  • Gold has not yet emerged as a good choice for diversification
  • It is too early to invest in the energy sector or in international equities

The slowly improving U.S. economy and low interest rates have created a favorable environment for real estate investments. The Select Construction and Housing Fund (FSHOX) and the Real Estate Income Fund (FRIFX) are two excellent Fidelity funds, which allow investors to participate in this trend. The blue arrow in the top panel of the chart below shows that FSHOX has a positive relative strength compared to the S&P 500 index, because FSHOX has outperformed the S&P 500 index since August of 2014. Similarly, FRIFX has outperformed the benchmark Fidelity Spartan U.S. Bond Index Fund (FBIDX).

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As the U.S. economy continues to improve, the Fed may start to increase interest rates in late 2015 or early 2016. In a rising interest rate environment bond investors may find it increasingly difficult to identify income funds that do not decline in value. As an example, the Fidelity High Income Fund (SPHIX) has already started to decline:

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Two income funds that can outperform in 2015 are the Fidelity Spartan Municipal Income Fund (FHIGX) and the Fidelity Mortgage Securities Fund (FMSFX). The current yield of FHIGX is 3.54%, while FMSFX yields 2.49%.

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Style rotation refers to the periodic over and under performance of different investment styles, such as growth vs. value, or large cap vs. small cap. For most of 2014 growth has outperformed value investing, and large caps have outperformed small caps. In 2015, we think that these relative trends can easily reverse. Two Fidelity funds, which can help investors to participate, are the Fidelity Value Fund (FDVLX) and the Fidelity Low-Priced Stock Fund (FLPSX):

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Investing in gold mining stocks can provide an attractive opportunity for portfolio diversification. Of course, the best time to invest in the gold mining sector is when it is not declining. Unfortunately, that is not the case right now. However, should this trend reverse, the Fidelity Select Gold Fund (FSAGX) is an excellent mutual fund for investing in this sector.

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The history of the stock market shows that the weakest investments in one year can often become the best performing investments a year or two later. However, looking at natural resources and international stocks, the two weakest investments areas in 2014, we think that they likely to continue to decline in early 2015, therefore it is too early to accumulate an investment position.

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Read more about investment strategies involving these funds at FidelitySignal.com

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Stock Market Correction Causes Flight to Safe Investments

As the equity market correction unfolds, the current list of the top 10 Fidelity mutual funds shows a dramatic shift compared to what we have seen throughout the year: seven out of the top ten funds are now income funds.

 

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One of the most important new developments is that the yield of the 30-year Treasury bond continues in a downtrend causing long-term Treasury bonds to to resume a very strong uptrend:

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The weakest investments that I highlighted in previous blog articles, such as mutual funds investing in the Eurozone and energy, have continued to decline. However, they are so oversold now that it would not be surprising to see a relief rally.

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The market leaders of the last 12 months, including technology and communications sectors, are turning over now, which is a worrisome sign about the short-term prospects of the stock market:

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View investment strategies at FidelitySignal.com

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European Markets in Downtrend

Both weakening economic conditions outside of the U.S. and geopolitical risks have caused the dollar to strengthen against all major currencies since May, including the Euro:

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The weak Euro coupled with renewed fears about recession in the Eurozone have negatively impacted European equities. Prudent investors may want to avoid investing in European equity markets until the downtrend reverses.

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View buy and sell signals at FidelitySignal.com

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Emerging Markets in Downtrend

Weakening growth in international markets, the strengthening dollar and the prospect of higher interest rates in the U.S. negatively impacted emerging markets in September. The chart of the Fidelity Emerging Markets Fund (FEMKX) below shows that after a brief rally in August, the bullish trend sharply reversed and FEMKX is now in a bearish downtrend.

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Fidelity has several funds that allow investors to make region-specific bets in emerging markets. The comparison of these regional funds show that the Latin America Fund (FLATX) and the Emerging Europe, Middle East and Africa Fund (FEMEX) are the weakest, while the Southeast Asia Fund (FSEAX) has held up better:

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Buy and sell signals for Fidelity funds are available at FidelitySignal.com

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Fidelity China Region Fund is the Top International Investment

During the last market correction in late July we observed that the Fidelity China Region Fund (FHKCX) held up the best during the sell off and may continue to do well in the fall. Indeed, FHKCX continued its bullish trend into September and now ranked the top-performing Fidelity international fund by FidelitySignal.com.

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