Can International Markets Outperform the U.S. Stock Market in 2017?

A sharp sell-off in the Brazilian stock market spooked investors two days ago. The sell-off came after bribery allegations surfaced against the president of Brazil:

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The plunge in Brazilian shares did not spread to international markets in Europe and Asia, which highlights the importance of diversification.

The chart of the Fidelity Diversified International Fund (FDIVX) shows that international markets are outperforming the S&P 500 index since March, as shown by the FDIVX:$SPX ratio line pointing up (see blue arrow in the bottom panel):

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Global Equity Markets Rally; The Market is Climbing the Wall of Worry

Summary

  • A huge global equity rally is under way following the first round of the French election.
  • U.S. stocks also rallied. The NASDAQ index surpassed the psychologically important 6000 level for the first time.
  • New sector breakouts can provide “catch up” trade opportunities.
  • Geopolitical and domestic conflicts can derail the global rally, but so far the markets are climbing the “wall of worry”.

 

In our previous blog post, we made a bullish case for the equity market. The global rally did indeed start yesterday after the results of the first round of the French presidential elections were announced, as traders placed bets on a market-friendly outcome of the final election in early May.

The French stock market rallied strongly in response to the election results on Monday and today. What’s even more interesting is that the volume of the iShares MSCI France ETF (EWQ) spiked on Friday before the results were announced:

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The rally spread to almost all international markets, including emerging markets:

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U.S. stocks rallied, as well, with the S&P 500 index breaking above the downtrend line decisively:

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The Nasdaq index, which is primarily driven by growth companies in the technology sector, broke above the psychologically important 6000 level today.

Why is this level important? Many investors remember breaking the 5000 level at the peak of the dot-com bubble in 2000. Valuations are much more reasonable today, but it is amazing that it took 17 years for the Nasdaq index to make the next milestone, after moving above the 5000 level last summer:

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The technology sector continues to lead the market, but the rally is broad based. A new development is that Health Care sub-sectors are moving higher in the momentum ranking:

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The materials sector is also strengthening. The new breakout for the Fidelity Select Chemicals Fund (FSCHX) represents a “catch up” opportunity to participate in the rally:

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The Fidelity Select Health Care Fund (FSPHX) has also made a new high:

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Books describing the history of the stock market are filled with examples of the markets climbing the “wall of worry”. This expression refers to situations when equities advance, in face of known and real dangers that can derail the advance.

It seems that the current market environment is not unlike of the historic examples. Heightened geopolitical tensions on the Korean peninsula and in the Middle East, ongoing budget ceiling negotiations in Washington, trade disputes with Canada, and unexpected earnings surprises can negatively impact market sentiment within a short time.

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Large Price Drops of Some Fidelity Select Funds are Due to Capital Gains Distributions

Several Fidelity sector funds experienced large drops in their net asset values (NAVs) on Friday. The explanation is that Friday was the ex-dividend date for these funds.

For investors who chose to reinvest the distributions automatically, the value of their holdings will be readjusted on Monday. For investors who chose not to reinvest, their investment account will be credited with the distribution amount.

Here are a few examples of sector funds experiencing large price drops:

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The simplest way to double check recent distributions is by going to the Fidelity.com website directly. For example, here are the most recent capital gains distributions for the Fidelity Select Automotive Fund (FSAVX):

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Link: https://fundresearch.fidelity.com/mutual-funds/fees-and-prices/316390699

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Conservative Investments Lead the Market in 2016

After high market volatility in 2015, it is not surprising to see that investors are favoring conservative investments in 2016. We’d like to highlight here a trio of conservative sector funds, which show improving relative strength compared to the S&P 500 index.

The Fidelity Select Utilities Fund (FSUTX) returned an impressive 14.5% in the last three months, surpassing the 2.77% return by the benchmark Fidelity Spartan 500 Index Fund (FUSEX) in the same period:

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The Fidelity Select Telecomm Fund (FSTCX) is at a new all-time high level and returned 10.17% in the last three months:

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The Fidelity Select Consumer Staples Fund (FDFAX) reached an all-time high too, and returned 6.32% in the last three months:

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Read more about investment strategies at FidelitySignal.com.

 

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Real Estate Funds at All-Time High Levels

A stealth rally is under way in real estate equity and income investments, while most of the financial media is focused on developments around oil and other natural resources.

The Fidelity Real Estate Portfolio Fund (FRESX) is now at a new all-time high level surpassing the previous high reached in January of 2015:

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Our favorite investment in this space is the Fidelity Real Estate Income Fund (FRIFX) that is also at a new all-time high:

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Read more about investment strategies at FidelitySignal.com.

 

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Best Bond Funds for 2016

After the market turmoil in the second half of 2015, new trends have emerged in 2016. One of the important new trends is that the long-term Treasury yield index reversed direction and going lower:

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Lower long-term interest rates coupled with the strengthening U.S. economy makes bond investments attractive again. The Fidelity U.S. Bond Index Portfolio Fund (FBIDX) is a great way to participate in the new investment environment, because FBIDX invests in both Treasury and corporate bonds.

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One of our long-term favorites is the Spartan Municipal Bond Fund (FHIGX). This fund has been making steady gains since October 2015 and we believe that the improving economy should continue to strengthen the credit worthiness of issuers and increase demand for municipal bonds.

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Read more about investment strategies at FidelitySignal.com.

 

International Markets in Turmoil – Part 2

Summary:

  • The German equity market is in a downtrend with negative impact for Europe
  • The bear market in natural resources continues to pressure Latin American and Asian markets
  • In our opinion, international markets will continue to decline and should be avoided in the near term

In our June blog post we warned about the rise of geopolitical risks and their impact on international markets. In the summer, one of the main concerns was the potential exit of Greece from the Euro Zone. While the exit did not happen, the continued weakness of the Greek equity market (GREK) shows that Greece is not yet in a better shape than before, and it is likely that the question will have to be addressed again in 2016.

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Our current concern is the weakness of the German market, which is the largest and strongest economy of Europe. To illustrate the concern, lets take a look at two German bellwether stocks, Volkswagen (VLKAY) and Deutsche Bank (DB).

The chart below shows that the highly publicized “Dieselgate” emissions scandal has caused a more than 50% drop for the Volkswagen stock so far. With litigations just starting up and the recall for the diesel cars still not available, we see the weakness to continue for the near term. The chart of Deutsche Bank is also very bearish with a recent technical breakdown below the support level.

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The chart of the German equity market shows a similar negative pattern:

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Besides the weakness of the German market, Europe has two additional problems that will have to be resolved before we can turn bullish again. The first is the concern about the effectiveness of the quantitative easing program with the ECB starting to hint again at the need for a new round of money printing. The second concern is the economic impact of the flood of immigrants and the political tensions it created in the Euro Zone.

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Our second topic is the impact of the bear market in natural resources, such as oil, on emerging markets that are net exporters of raw materials. The chart of the Fidelity Natural Resources Fund (FNARX) shows that the bear market resumed in late summer and downside volatility is very high:

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It is not surprising to see that equity markets in Latin America and in Asia are also in a steep decline:

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Visit FidelitySignal.com for investment strategies involving Fidelity mutual funds.