Download Business Cycle Update: US Economy Sturdy, Global

Market Perspectives
December 2014 / January 2015
Business Cycle Update:
U.S. Economy Sturdy, Global Divergences
May Spur Volatility in 2015
The U.S. economy continues to exhibit broad-based strength, bolstered by an
improving real income outlook for the U.S. consumer. Looking abroad, sluggish
economic growth, disinflationary trends, and increasingly accommodative
monetary policy characterise the landscape. These global divergences may incite
higher market volatility over the course of 2015.
KEY TAKEAWAYS

The U.S. economy continues to strengthen, driven by gains in the employment
and manufacturing sectors.
LEVEL OF INDICATOR
STRONG
U.S. ECONOMIC INDICATORS SCORECARD
Capital Expenditure
Corporate
Manufacturing
Credit/Banking
Employment
Consumption
Housing
WEAK
Global
WORSE
BETTER
RECENT TREND IN INDICATOR
The economic indicators
scorecard is an illustrative
framework based on the
analysis summarised in
“Recent trends in major
categories” beginning on
page 2.
Movement along the
horizontal axis depicts
whether the recent trend has
become better or worse,
while vertical placement
indicates whether the
indicator is currently in a
stronger or weaker overall
condition. Shaded trails
show the changes from the
previous reading.
For illustrative purposes only.
Source: Fidelity Investments (Asset Allocation Research Team), as of 3 December 2014.




Stark divergences punctuate the
global landscape, with the
strengthening U.S. economy moving
toward policy tightening, while
weakness in other major economies
leads to even greater stimulus
measures
Tepid global growth and broad-based
disinflationary trends are likely to
persist into 2015, restraining
commodity prices and global bond
yields
Market volatility may rise as we move
deeper into 2015 due to potential risks
such as Fed tightening, slowing
growth in China, and fuller asset
valuations.
From an asset allocation standpoint,
our outlook for equities remains
constructive, favouring mid-cycle U.S.
and European equities, though the
magnitude of gains may be more
limited
Low inflation and strong global
demand for bonds should prevent a
dramatic spike in interest rates—a
dynamic supportive of high-quality
bond exposure to help diversify riskier
assets, even in an environment of
monetary tightening
Authors
Dirk Hofschire, CFA
SVP, Asset Allocation Research
While long-term historical averages provide reasonable baselines for portfolio
allocations, over shorter time horizons asset price fluctuations are driven by a
confluence of various short-, intermediate-, and long-term factors that may cause
performance to deviate significantly from historical averages. For this reason, we
employ an asset allocation framework that analyses underlying factors and trends
among the following three temporal segments: tactical (one to 12 months), business
cycle (one to 10 years), and secular (10 to 30 years). This report, part of a monthly
series, focuses primarily on the intermediate-term fluctuations in the business cycle.
Lisa Emsbo-Mattingly
Director of Asset Allocation Research
This document has been provided by
Pyramis Global Advisors. Pyramis is a
subadvisor of institutional investment
products to Fidelity Worldwide
Investment.
1
accommodative, as the European Central Bank (ECB) has
implemented various easing measures, which, at a
minimum, should offset the remaining 2011/2012 long-term
refinancing operations (LTROs) due to mature in January.
Europe’s expansion is likely to remain weak, but a
continental triple-dip into recession appears unlikely.
Recent trends in major categories
The following is a detailed look at developments in major areas
of the economy.
Global
The global economy decelerated in 2014 and remains on a
slow growth trajectory, with GDP expectations continuing to
shift downward since 2010 (see Exhibit 1, below). Widening
economic and policy divergences punctuate the global
landscape, with countries outside the U.S. in various phases of
the business cycle. Leading economic indicators deteriorated
during the first six months of the year, but have stabilised over
1
the past four months. Moreover, economic weakness has
spurred some positive offsetting factors, including lower energy
prices that will benefit consumers, weaker currencies (relative
to the dollar) that make exports more competitive, and
monetary and fiscal policy responses that have become more
accommodative.

Europe. Recent weakness has likely been symptomatic of
a mid-cycle slowdown rather than the onset of a new
recession. In November’s “Business Cycle Update: Market
Wobble Presents Opportunities, Including Mid-Cycle
Europe,” we made the case that Europe’s tightening
monetary and credit conditions over the past two-and-ahalf years is coming to an end, with increased
competitiveness and pent-up demand in the periphery
supporting Europe’s cyclical momentum. The completed
asset quality review (AQR) stress tests should encourage
banks to continue to ease lending standards, a key
2
component for mid-cycle credit growth. Moreover, both
monetary and fiscal policies are becoming more
Exhibit 1: Emblematic of tepid global growth,
expectations for most countries have fallen during the
past several years.
Japan. At the beginning of the year, we predicted that
Japan’s consumption-tax hike in April would impede the
economy’s cyclical expansion, resulting in greater monetary
easing from the Bank of Japan (BOJ) with ensuing yen
weakness. After the tax hike, Japan suffered two negative
quarters of GDP growth and is currently in a mild recession,
as it has been unable to regain cyclical traction. The BOJ
has dramatically expanded its quantitative easing program,
3
and the yen has declined by 13%. However, the Japanese
economy should benefit in the near term from a cheaper
yen supporting the export sector, lower oil prices aiding the
consumer, and the delay of the 2015 consumption tax
providing less restrictive fiscal policy.

China. China remains in a cyclical downtrend, with a
deteriorating real-estate sector amid massive home-price
and credit imbalances. While the property sector remains
weak and credit growth has slowed considerably, policy
easing may be helping to stabilise activity at a lower level.
After several months of targeted lending programs and
easing measures, in November the central bank
implemented its first broad-based cut to lending rates in
more than two years. Along with a continued effort to step
up government infrastructure spending, policymakers
appear to be emphasizing another round of fixed-asset
investment to offset weakening private-sector activity.
These measures reduce the immediate threat to financial
stability, but they fail to address the high levels of leverage,
overcapacity, and weak profitability that have weakened the
private sector, making a sustainable reacceleration unlikely.
2
The emerging-market (EM) outlook is also challenged, since
more than 75% of EM equity market capitalization consists of
4
commodity exporters and China’s East-Asian trading partners,
whose outlooks are highly contingent on the severity and timing
of China’s descending trend. After some recent weakness,
global growth is positive but likely to remain muted and
varied among countries, as accommodative policy action in
many regions may lack the potency to produce a
sustainable reacceleration.
0
U.S. employment and consumption
IMF GROWTH EXPECTATIONS (NEXT 12 MONTHS)
10
2014
2010
8
6
4
China
India
Philippines
Indonesia
Korea
Mexico
U.S.
Turkey
Australia
U.K.
Canada
South Africa
Spain
Germany
Brazil
France
Italy
Japan
Russia
Real GDP Growth (%)

Source: International Monetary Fund, Haver Analytics, Fidelity
Investments (AART), as of 7 October 2014.
Relative to current demographic trends, the pace of hiring today
is the fastest it’s been in almost 15 years. During the past year,
5
the U.S. has added more than 2.6 million jobs, but the workingage population has grown by only about 1.4 million workers (see
6
Exhibit 2). Leading economic indicators, such as initial
unemployment claims, job openings, and the nonmanufacturing
2
Purchasing Managers’ Index (PMI) for employment remain in
upward trends as well, suggesting that this pace of improvement
7
may continue in 2015. Over the longer term, demographic trends
in the U.S. are poised to slow further: 10 years from now, the U.S.
economy will need to add just 50,000 to 60,000 jobs per month, as
retiring baby boomers are expected to push the participation rate
even lower going forward.
Exhibit 3: Employers did not restrain real wage increases
during the 2008 recession to the same extent they had
during previous downturns, implying they might now be
slower to raise them.
CHANGE IN EMPLOYMENT AND WAGES
DURING RECESSIONS
Increase in Unemployment Rate (percentage points)
Despite the labour market tightening, nominal wage growth
remains slow and may continue at a relatively modest pace. While
the slack in the labour market remains a significant drag on wages,
pent-up wage deflation from the 2008 recession is likely also
restricting wages. During deep recessions, such as 1973 and
1981, companies cut jobs and limited real wage increases for
remaining workers, resulting in declines in real (inflation-adjusted)
wages (see Exhibit 3, right). However, in 2008, companies did not
limit wage growth as significantly, causing real wages to continue
to rise. As a result, employee earnings may have been higher at
the start of this recovery than is typical, potentially hindering
companies’ willingness to accelerate wage growth today.
Even though the current pace of nominal wage gains is relatively
modest, when combined with slowing inflation due to falling
commodity prices it is strong enough to provide the U.S. consumer
with its best outlook for real income growth since before the
financial crisis. Moreover, the current pace of wage gains is also
not detracting from corporate profitability, which would be a sign of
rising late-cycle pressures. The result is an incrementally more
positive outlook for personal consumption—albeit still not as strong
as during previous expansions because the savings rate remains
8
elevated and consumers remain hesitant to increase borrowing.
Job gains, incrementally improving wages, and slowing
commodity inflation provide a favourable backdrop for real
consumer spending in 2015.
Exhibit 2: Considering current demographic trends, the
pace of hiring in the U.S. is the fastest it’s been in almost
15 years.
Employment vs. Population Growth
Population Growth
2.0
4
1.8
2
0
1.6
–2
1.4
–4
1.2
2019
2016
2013
2010
2007
2003
2000
1997
1994
1990
1987
–8
1984
–6
% Change in Real Average Hourly Earnings
4%
2%
0%
–2%
–4%
–6%
1973
1981
Recessions
2008
Source: Real average hourly earnings deflated by headline CPI.
Recessions dated by the National Bureau of Economic Research
(NBER). Source: Bureau of Labor Statistics, NBER, Haver Analytics,
Fidelity Investments (AART), through 24 November 2014.
Credit and banking
Credit conditions in the U.S. remain constructive and on a trend
of further improvement. Banks have continued to ease credit
standards across the board, while write-offs and delinquencies
have reached new cycle lows. Outstanding mortgage debt has
continued to increase, rising 4% on a year-over-year basis after
9
falling during the previous five years. Despite strong
fundamentals, credit spreads have been trending higher over
the past several months, as investors may be bracing for less
liquid markets following the completion of the Federal
Reserve’s (Fed’s) quantitative easing program. Nevertheless,
corporations continue to enjoy ample access to credit markets.
Improving credit conditions provide a tailwind to the midcycle expansion in the U.S.
Corporate
Growth in Working Age
Population (Millions)
6
1981
Difference Between Payroll
Employment and Working Age
Population* Growth (Millions)
EMPLOYMENT GROWTH VS. POPULATION GROWTH
6%
1.0
*Population ages 16 and over, adjusted for the participation rate.
Source: Bureau of Labor Statistics, U.S. Census Bureau, Haver
Analytics, Fidelity Investments (AART), through 24 November 2014.
The corporate sector remains solid, supported by rising
revenues and elevated profit margins. Earnings rose in the third
10
quarter, increasing by 10.6% year over year. Corporate
revenues climbed by more than 5% for the second-straight
11
quarter, outpacing 2013 and historical average sales growth.
Profit margins have expanded throughout 2014 to all-time highs
and should remain elevated, as companies continue to enjoy
low borrowing rates, soft producer prices, muted wage
pressures, and strong cyclical productivity. The outlook for
business spending also continues to improve, as surveys of
corporations report plans to increase capital expenditures in the
12
next 12 months. Additionally, manufacturing remains one of
the strongest sectors of the U.S. economy, with the PMI
3
reported as 58.7 in November, an indication that the sector
13
remains in solid expansionary territory. The increase in the
manufacturing bullwhip—new orders less inventories—shows
healthy demand and supports a positive outlook for the sector.
Solid earnings growth, strong manufacturing activity, and
an improving outlook for capital spending indicate a
healthy corporate sector in 2015.
Housing
After a rapid recovery in 2013, the housing market’s more
mature pace of expansion has persisted late into 2014.
Housing permits—a leading indicator of residential construction
activity—trended generally positive throughout the latter part of
14
the year for single-family homes. Housing affordability
remains high and has ticked up in recent months, helped by
moderating home price gains and a renewed decline in
15
mortgage rates. Employment growth, mortgage credit
easing, and limited housing supply provide a favourable
backdrop for the housing sector’s steady, moderate
expansion.
Inflation
Inflationary pressures remain minimal in the United States, with
disinflation gaining the upper hand due to slow global growth
and continued muted wage gains. U.S. inflation was flat month
over month in October, and the headline and core consumer
price indices (CPI) were up just 1.7% and 1.8% year over year,
16
respectively. Shelter costs have been the largest contributor
to U.S. inflation over the past two years; core CPI ex-shelter is
17
running at a rate of only 0.9%, suggesting that there may be
widespread disinflationary pressures throughout the U.S.
economy. Sluggish global growth has weighed on commodity
prices, with crude oil prices dropping 35% since the start of the
18
year. Alongside wage gains, disinflationary trends seen
in falling commodity prices should continue to benefit the
U.S. consumer.
Summary and outlook
As 2014 unfolded, the strengthening mid-cycle expansion in the
U.S. created a stark divergence with most of the rest of the
world, as growth decelerated in China and Europe, and
contracted mildly in Japan. Now, at the end of the year, solid
U.S. growth has led to less policy accommodation, as the Fed
ended its quantitative easing program, while weaker non-U.S.
growth led to a spurt of even greater stimulus measures
announced by China, Japan, and Europe. The deviating
economic and policy trends among the world’s largest
economies set the stage for a strong appreciation in the U.S.
dollar in relation to most of the world’s currencies. Oil and other
commodity prices, in addition to global government bond yields,
tumbled amid tepid global growth and broad disinflationary
trends (see “What a strengthening dollar and plummeting oil
prices mean for 2015,” starting on page 4).
Global economic outlook
Our cyclical outlook for the global economy is for many of these
divergent patterns to continue in 2015. Specifically:

Global growth is likely to remain tepid, as policy measures
lack the potency to create sustainable acceleration in many
regions, including late-cycle China and mildly contracting
Japan.

Global disinflation will continue amid subdued demand and
muted wage pressures.

The U.S. mid-cycle expansion remains steadier than most
other economies, with its consumer sector benefiting from
global disinflation.

Some offsetting developments, such as cheaper commodity
prices, weaker currencies, and increased policy easing should
prevent non-U.S. growth from weakening dramatically.

Europe’s economy is likely to remain slow but should emerge
from a mid-cycle slowdown.
What a strengthening U.S. dollar and
plummeting oil prices mean for 2015
The U.S. dollar
Why the big move?
The dollar’s appreciation is largely a reflection of the relative
strength of the U.S. economy. Better economic and corporate
performance is making U.S. assets more attractive to foreign
investors. It has also enabled the Fed to conclude its
quantitative easing program and consider tightening in 2015,
increasing the appeal of the interest rate backdrop in the U.S.
for foreign bond investors relative to many other countries
where monetary policy easing is ongoing.
What’s the impact?
Overall, the impact on the U.S. economy is mixed. U.S.
consumers benefit from increased purchasing power, as the
dollar now buys more imported goods. However, a stronger
dollar is a drag on the profitability of exporters and
multinational corporations, as earnings generated abroad
translate into fewer dollars and cost-competitiveness is
reduced.
What’s the outlook?
We expect the dollar to remain strong, as the underlying
economic trends are unlikely to reverse any time soon.
However, after the sharp drop in many foreign currencies, the
pace of any additional dollar strengthening may be much more
muted in 2015.
Oil prices
Why the big move?
Oil markets were impacted by a growing excess of supply over
demand as 2014 unfolded. Global demand was slower than
expected, as China, Japan, and other (continued on page 5)
4
Risks


Market volatility will likely rise. Economic and policy
divergences are likely to continue to generate volatility in
currency markets, and could spread to other areas. Fed
tightening might harm assets and entities most-dependent
on abundant liquidity, including emerging markets and
some credit sectors. Tactical maneuvers may be rewarded.
Steadier cyclical outlooks suggest potentially better
risk-adjusted returns in the U.S. and Europe. After
years of rapid credit and capacity expansion, China and
many emerging markets have little impetus for an earlycycle acceleration, and a slow global economy and
potential Fed tightening are hindrances.
Crude Oil Price (Right)
$110
$90
$70
Sep-14
Nov-14
Jul-14
May-14
Trade-Weighted USD (Left)
$50
WTI Oil Price (USD/Barrel)
$130
Jan-14
110
108
106
104
102
100
98
96
Mar-14
Outlook for equities still favourable, though the
magnitude of gains may diminish. In general, the
environment of incremental growth, low inflation, and low
interest rates should still be supportive of risk assets.
However, fuller valuations in many asset categories
suggest returns will be more muted than in recent years.
U.S. DOLLAR VS. OIL PRICES
Nov-13

Exhibit A: The U.S. dollar climbed while oil prices
tumbled in the second half of 2014.
Sep-13
As a result, our asset allocation outlook for 2015 is as follows:
We expect global commodity prices to remain weak amid
slowing growth in China, lackluster global demand, and
positive supply growth. However, after the steep drop, oil
prices may enter a trading range over the next year or two, as
lower prices act to restrain supply additions and potentially
spur renewed demand.
Jul-13
Asset allocation outlook
What’s the outlook?
May-13
Market dynamics. After several years of gains, global
equity and bond valuations are pricing in more good news
and may be more susceptible to negative surprises. In
particular, limited liquidity in some areas of the bond
market has the potential to magnify any volatility.
On balance, lower oil prices are a net positive for the global
economy because they benefit consumers in large importing
countries, including the U.S., China, Japan, Europe, and
India. There could be some negative impact on U.S. oilproducing regions if future investments slow, but countries
whose economies are largely dependent on oil exports,
including Russia, Venezuela, and many Middle Eastern
nations, will likely suffer from lower oil prices.
Mar-13

Fed tightening. Our base-case scenario is that the Fed will
hike its benchmark interest rate in 2015, but the tightening
will be modest. Clear improvement in U.S. labour markets
will be partially offset by weak global growth and disinflation,
obviating the need for a steep tightening cycle. However,
rising short-term U.S. rates, in addition to monetary policy
uncertainty, are likely to create greater market volatility.
Faster-than-expected U.S. wage growth would present
greater late-cycle risks to the markets, though we consider
this a lesser probability in 2015.
What’s the impact?
Jan-13

(continued from page 4)
major importers registered disappointing growth. Supply also
exceeded expectations, as war-torn Libya significantly
increased output and U.S. production continued on its steady
ascent. Moreover, Saudi Arabia—the world’s largest swing
producer—did not step in with supply cuts to prop up markets
as it has done in the past.
Nominal TradeWeighted USD Index
While market volatility in 2014 was relatively muted in global
equity and bond markets, a number of risks are likely to stir up
greater volatility as we move deeper into 2015. The following are
among the most concerning:
 Global growth risks. Once the engines of global growth,
both Asia and developing economies face major cyclical
challenges. China is still trying to navigate an environment
of slower growth mixed with a severe overhang of credit
excesses, real estate prices, and overcapacity. Japan’s
attempts to jump-start its deflationary economy have yet to
produce a sustainable uptrend in domestic consumption or
investment. Many emerging-market economies have
downshifted but lack an impetus for reacceleration.
Generally, the slow-growth environment makes the global
economy less resistant to any potential shocks.
Source: Federal Reserve Board, U.S. Energy Information
Administration, Haver Analytics, Fidelity Investments (AART), as of
30 November 2014.

A spike in interest rates remains unlikely. Low inflation
and strong global demand for bonds should help keep rate
increases from being dramatic. This dynamic supports
maintaining high-quality bond exposure to help diversify
risk assets, even in an environment of monetary tightening.

Commodity disinflation is likely to continue. After a
steep drop in 2014, commodity prices may be more rangebound going forward, but weak global growth
fundamentals suggest a strong upside is unlikely.
5
The U.S. mid-cycle expansion persists, while Germany faces a mid-cycle slowdown. Risks in China remain elevated, but
have been tempered by accommodative monetary policy. Japan has entered a mild recession.
TYPICAL BUSINESS CYCLE
Note: This is a hypothetical illustration of a typical business cycle. There is not always a chronological progression in this order, and there have been
cycles when the economy has skipped a phase or retraced an earlier one. Economically sensitive assets include stocks and high-yield corporate
bonds, while less economically sensitive assets include Treasury bonds and cash. *A growth recession is a significant decline in activity relative to a
country’s 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).
Authors
Dirk Hofschire, CFA
SVP, Asset Allocation Research
Lisa Emsbo-Mattingly
Director of Asset Allocation Research
The Asset Allocation Research Team (AART) conducts economic, fundamental, and quantitative research to develop asset allocation
recommendations for our portfolio managers and investment teams. AART is responsible for analysing and synthesizing investment perspectives
across the asset management unit to generate insights on macroeconomic and financial market trends and their implications for asset allocation.
Asset Allocation Research Analysts Austin Litvak, Jacob Weinstein, Caitlin Dourney, Joshua Lund-Wilde, Ilan Kolet, Irina Tytell, and
Jordan Alexiev also contributed to this article. Thought Leadership Associate Editor Kevin Lavelle and Investment Writer Christie Myers
provided editorial direction.
6
Views expressed are as of the date indicated, based on the information
available at that time, and may change based on market and other conditions.
Unless otherwise noted, the opinions provided are those of the authors and not
necessarily those of Fidelity Investments or its affiliates. Fidelity Investments
does not assume any duty to update any of the information.
Generally, among asset classes, stocks are more volatile than bonds or
short-term instruments and can decline significantly in response to
adverse issuer, political, regulatory, market, or economic developments.
Although the bond market is also volatile, lower-quality debt securities
including leveraged loans generally offer higher yields compared to
investment grade securities, but also involve greater risk of default or
price changes. Foreign markets can be more volatile than U.S. markets
due to increased risks of adverse issuer, political, market, or economic
developments, all of which are magnified in emerging markets.
Investment decisions should be based on an individual’s own goals, time
horizon, and tolerance for risk.
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 carry inflation, credit, and default risks for both issuers
and counterparties.
Investing involves risk, including risk of loss.
6
Population of available workers is the growth in resident population ages 16 and
over, adjusted for the participation rate. Source: Bureau of Labor Statistics, U.S.
Census Bureau, Haver Analytics, Fidelity Investments (AART), as of 7
November, 2014.
7
Source: U.S. Department of Labor (initial unemployment claims), Bureau of
Labor Statistics (job openings), Institute for Supply Management (nonmanufacturing PMI), Haver Analytics, Fidelity Investments (AART), as of 22
November 2014. Job openings data as of 7 November 2014. Non-manufacturing
PMI data as of 5 November 2014.
8
Source: Bureau of Economic Analysis (personal savings rate), Federal Reserve
(consumer borrowing), Haver Analytics, Fidelity Investments (AART), as of 26
November 2014. Consumer borrowing data as of 18 September 2014.
9
Federal Reserve Bank of New York Consumer Credit Panel/Equifax, Fidelity
Investments (AART), as of 25 November 2014.
10
Standard & Poor’s (S&P), Haver Analytics, Fidelity Investments (AART), as of
21 November 2014.
11
S&P, Haver Analytics, Fidelity Investments (AART), as of 21 November 2014.
12
Duke CFO Magazine Global Business Outlook Survey, Fidelity Investments
(AART), as of 11 November 2014.
13
Institute for Supply Management, Haver Analytics, Fidelity Investments
(AART), as of 30 November 2014.
14
Past performance is no guarantee of future results.
U.S. Census Bureau, Haver Analytics, Fidelity Investments (AART), as of 31
October 2014.
Diversification does not ensure a profit or guarantee against loss.
15
All indices are unmanaged. You cannot invest directly in an index.
The Typical Business Cycle 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 such as stocks
tend to experience their best performance of the cycle.
• During the typical mid-cycle phase, the economy exits recovery and enters
into expansion, characterised by broader and more self-sustaining economic
momentum but a more moderate pace of growth. Inflationary pressures
typically begin to rise, monetary policy becomes tighter, and the yield curve
experiences some flattening. Economically sensitive asset classes tend to
continue benefiting from a growing economy, but their relative advantage
narrows.
• During the typical late-cycle phase, the economic expansion matures,
inflationary pressures continue to rise, and the yield curve may eventually
become flat or inverted. Eventually, the economy contracts and enters
recession, with monetary policy shifting from tightening to easing. Less
economically sensitive asset categories tend to hold up better, particularly right
before and upon entering recession.
Please note that there is no uniformity of time among phases, nor is there
always a chronological progression in this order. For example, business cycles
have varied between one and 10 years in the U.S., and there have been
examples when the economy has skipped a phase or retraced an earlier one.
Endnotes
1
Organisation for Economic Co-operation and Development (OECD),
Foundation for International Business and Economic Research (FIBER),
Fidelity Investments (AART), as of 30 September 2014.
2
ECB, Fidelity Investments (AART), as of 30 September, 2014.
3
Bloomberg Finance L.P. Fidelity Investments (AART), as of 3 December,
2014.
4
Source: MSCI EM Index, Bloomberg Finance L.P., Fidelity investments
(AART), as of 31 October 2014.
National Association of Realtors’ Housing Affordability Index, Haver Analytics,
Fidelity Investments (AART), as of 30 September, 2014.
16
BLS, Haver Analytics, Fidelity Investments (AART), as of 31 October 2014.
17
BLS, Haver Analytics, Fidelity Investments (AART), as of 31 October 2014.
18
FactSet, Energy Information Administration, Fidelity Investments (AART), as of
2 December 2014.
Index definitions
The Consumer Price Index (CPI) is a monthly inflationary indicator that measures
the change in the cost of a fixed basket of products and services, including
housing, electricity, food, and transportation.
The MSCI Emerging Markets (EM) Index is a market capitalization-weighted
index of over 850 stocks traded in 22 world markets.
A 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 to the previous month, while a reading under 50 represents a
contraction, and a reading of 50 indicates no change. Institute for Supply
Management® reports the U.S. Manufacturing PMI®. Markit compiles
non-U.S. PMIs.
Important Information
Information presented herein is for discussion and illustrative purposes only and
is not a recommendation or an offer or solicitation to buy or sell any securities.
Index or benchmark performance presented in this document do not reflect the
deduction of advisory fees, transaction charges, and other expenses, which
would reduce performance.
Certain data and other information in this research paper were supplied by
outside sources and are believed to be reliable as of the date presented.
However, Pyramis has not verified and cannot verify the accuracy of such
information. The information contained herein is subject to change without notice.
Pyramis does not provide legal or tax advice, and you are encouraged to consult
your own lawyer, accountant, or other advisor before making any financial
decision.
These materials contain statements that are “forward-looking statements,” which
are based upon certain assumptions of future events. Actual events are difficult
to predict and may differ from those assumed. There can be no assurance that
forward-looking statements will materialise or that actual returns or results will not
be materially different than those presented.
5
Source: Bureau of Labor Statistics (BLS), Haver Analytics, Fidelity
Investments (AART), as of 7 November, 2014.
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Important Information
This material is intended for investment professionals and must not be relied upon by private investors.
Fidelity Worldwide Investment refers to the group of companies which form the global investment management organisation that provides information on
products and services in designated jurisdictions outside of North America. Fidelity Worldwide Investment does not offer investment advice based on individual
circumstances. Any service, security, investment, fund or product mentioned or outlined in this document may not be suitable for you and may not be available
in your jurisdiction. It is your responsibility to ensure that any service, security, investment, fund or product outlined is available in your jurisdiction before any
approach is made to Fidelity Worldwide Investment. This document may not be reproduced or circulated without prior permission and must not be passed to
private investors. Past performance is not a reliable indicator of future results. Unless otherwise stated all products are provided by Fidelity Worldwide
Investment, and all views expressed are those of Fidelity Worldwide Investment.
Fidelity, Fidelity Worldwide Investment and the Fidelity Worldwide Investment logo and currency F symbol are trademarks of FIL Limited. Fidelity Investments
is a privately-owned financial services firm based in Boston, Massachusetts, USA. Fidelity Investments established Pyramis Global Advisors (Pyramis) in 2005
as a separate business unit to focus on institutional clients. Pyramis’ investment team was initially formed through the migration of investment professionals
from Fidelity Management & Research Company (FMR Co.), the mutual fund division of Fidelity Investments. Fidelity Worldwide Investment has agreed to be
responsible for the distribution of Pyramis Global Advisors’ (PGA) products outside of North America. This document has been written by members of PGA’s
investment team.
Issued by FIL Pensions Management (FCA registered number 144345) a firm authorised and regulated by the Financial Conduct Authority. FIL Pensions
Management is a member of the Fidelity Worldwide Investment group of companies and is registered in England and Wales under the company number
02015142. The registered office of the company is Oakhill House, 130 Tonbridge Road, Hildenborough, Tonbridge, Kent TN11 9DZ, United Kingdom. Fidelity
Worldwide Investment’s VAT identification number is 395 3090 35. Issuer in Germany: Issued in Germany by FIL Investments International - Niederlassung
Frankfurt on behalf of FIL Pension Management, Oakhill House, 130 Tonbridge Road, Hildenborough, Tonbridge, Kent TN11 9DZ. Issuer for Austria, Hungary,
Slovakia and Czech Republic: FIL (Luxembourg) S.A., 2a rue Borschette, 1021 Luxembourg.
EMEA20145762
8