Fidelity^® Strategic Disciplines

Fourth Quarter 2023 Review

• The Fidelity^® Intermediate Municipal Strategy seeks to generate federally tax-exempt interest income while limiting risk to principal over the long term.

• Market Backdrop: Bonds delivered healthy gains for both the quarter and the year.¹ Investors appeared less concerned about inflation or the risks of a deep recession.
• Performance: The strategy produced positive returns but underperformed the benchmark² for the quarter and the year (pre-tax, net of fees).
• Positioning: We have larger allocations relative to the benchmark³ to higher yielding sectors like transportation and health care, which witnessed strong returns for the quarter.⁴
• Outlook: A healthy jobs market, positive wage growth, and easing inflation may continue to help consumer spending and the economy. However, we expect economic growth to slow since interest rates remain high.

• The U.S. Federal Reserve (Fed) signaled it’s likely finished raising rates. It may even cut rates as soon as early this year should inflation continue to ease.
• Falling inflation, resilient consumers, and stabilizing corporate profits supported U.S. economic growth.

Bond markets experienced elevated volatility throughout the year. This volatility was especially pronounced in the fourth quarter when bonds prices swung from selloff territory into a sharp upward rally. The Fed’s policy of interest rate hikes and evolving outlook drove much of this volatility. The Fed raised rates four times in 2023 with the last hike coming in July.

Both the U.S. Treasury and municipal yield curves remained inverted as the year ended. This occurs when short-term yields are higher than long-term yields. Many investors view an inverted yield curve as a sign of economic pessimism and as a potential precursor to a recession. Both yield curves have been inverted since July 2022.

Inflation decreased over the year. On an annual basis, it remained above the Fed’s 2% target as the year ended. However, it has shown signs of running lower in the near term.⁶

• The strategy’s benchmark⁸ returned 6.5% during the quarter, pushing returns to 4.5% for the year.⁹
• Health care was the top performing municipal bond sector for the quarter.¹⁰

Healthy state and local budgets, low issuance, and strong demand supported municipal bond returns. Municipal issuance decreased overall by 2.8% year-over-year. Taxable municipal issuance witnessed the largest decline, down 31% over last year. Meanwhile, tax-exempt issuance increased 3.4% over the course of 2023.¹¹ 2024 issuance could be higher given potentially lower yields and municipals spending down their pandemic aid.

• We retained our preference for revenue bonds versus tax-backed municipal bonds.

We expect the yield curve to steepen in the coming year. As a result, we increased our exposure to the intermediate part of the yield curve, which we expect will outperform as the yield curve returns to a more normal shape.

• The Fed has projected the likelihood of three interest rate cuts in 2024.¹⁴

The U.S. economy remained in late-cycle expansion as the year ended. Given the current economic backdrop, it’s hard to see a catalyst for a deep recession soon. We believe inflation will likely trend down. A solid consumer backdrop and healthy corporate balance sheets may continue to support the U.S. economy.

Continued market volatility is common in late-cycle expansions. Nevertheless, we believe municipal tax-backed credit investments, such as general obligation (GO) bonds,¹⁵ will likely stay generally stable.

We consider indicators within the broader economy to complement our investment-focused fundamental approach.¹⁶ A few indicators we will closely monitor in 2024 include inflation, employment, and consumer spending. The Fed will also monitor these metrics to help it determine its path forward with interest rates.