Q2 2015 Quarterly Market Update Video Hello, I m Dirk Hofschire of Fidelity Investments. On behalf of my colleagues in the asset allocation research team, I d like to share with you some of our perspectives on the latest developments in the markets. During the first quarter of 2015, I d say the one defining characteristic that we saw was really the move to global monetary easing. So, more than thirty banks, central banks across the world eased monetary policy over the past three months and Europe and Japan had extraordinary policymaking with quantitative easing metrics. The U.S. stood in sharp contrast of this where the Federal Reserve maintained a neutral stance and is moving toward tightening. However, even the expectations for Fed tightening in 2015 diminished during the quarter as the economic data was somewhat disappointing. One of the major impacts of all this quantitative easing and other easing around the world is that it has further pushed down bond yields that were already pretty low. When you look around the world and you look at a place like Europe, for instance, you ve got about a fifth of the entire bond market now trading at negative yields and even long-term bond yields are near zero or near record lows. On a relative basis, U.S. bond yields are comparatively high and this has been one of the reasons that the U.S. has attracted a lot of foreign money into the markets that demand for the higher yields relative to the home
bond markets in places like Europe and Japan and it s helped to really keep a cap on how high long-term interest rates have gone in the U.S. and probably will continue to do so. One of the other major impacts of the policy divergences and the big easing that we ve seen has to do with creating more volatility in the foreign exchange markets. We now see greater fluctuations, higher volatility across currencies than we have since the global financial crisis. The U.S. dollar has remained strong and was up against many currencies in the first quarter, although as we go forward we really expect that the gap might start to close and that some of the biggest moves in the dollar might be behind it, in particular against the euro and some of the places in the world where the economies may be gaining more traction.
In terms of the global economic environment, we use our business cycle framework to analyze the major economies in the world. It's a situation where the U.S. remains in a relatively healthy mid-cycle dynamic. The rest of the world remains mixed, but one of the trends that we are noticing, we are seeing modest improvement in the global economy and it s being led by developed countries. So, Europe has really reaccelerated from a mid-cycle slowdown and is getting a boost from a better credit and monetary dynamic. Japan is still a little bit in recession but is starting to peek out on the other side and so this improvement in the developed world, the U.S., Europe, and Japan is a positive dynamic for the global economy and stands in contrast to many emerging markets like China that continued to really struggle with cyclical headwinds.
When you look more closely at the U.S. economy, you can see that the domestic-oriented side has been doing relatively well compared to the more external-oriented side. So things like exports, multinational profits, manufacturing, those sectors are more tied to global developments and the stronger dollar and they have softened as a result recently. However, the internal dynamic led by the U.S. consumer has actually brightened. So, the low inflation picture, low oil prices, tightening labor market, those things are really helping the income outlook for the U.S. consumer and should bode well for U.S. consumer spending going forward.
When you put it all together, the U.S. economy overall remains in sort of moderate growth, low inflation environment. That s a pretty decent mid-cycle phase that should be reasonably supportive of most equity and bond sectors. Although we do expect over the course of 2015 to see more volatility coming into the financial markets, especially if and when the Federal Reserve begins to hike interest rates. For more information on our perspectives and the current themes in the financial markets, please see our complete quarterly market update. Thank you. 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. The views and opinions expressed by the Fidelity speaker are those of their own as of the date of the recording, and do not necessarily represent the views of Fidelity Investments or its affiliates. Any such views are subject to change at any time based upon market or other conditions and Fidelity disclaims any responsibility to update such views. These views should not be relied on as investment advice, and because investment decisions are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity product. Neither Fidelity nor the Fidelity speaker can be held responsible for any direct or incidental loss incurred by applying any of the information offered. Please consult your tax or financial advisor for additional information concerning your specific situation. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. 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. Foreign investments involve greater risks than U.S. investments, and can decline significantly in response to adverse issuer, political, regulatory, market, and economic risks. Any fixed income security sold or redeemed prior to maturity may be subject to loss. 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 also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Lower-quality fixed income securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Changes in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industry. It is not possible to invest directly in an index. All indices are unmanaged.
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