Investment Objective
- The Fidelity® Tax-Managed U.S. Equity Index Strategy seeks the long-term growth potential of U.S. large-cap stocks and to deliver enhanced after-tax returns through active tax management.*
Key takeaways
- Market Backdrop: Stocks and 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’s pre-tax performance (net of fees) was similar to the Fidelity U.S. Large Cap IndexSM which was positive for the quarter.
- Tax Management: Market volatility during the quarter resulted in enhanced after-tax returns (net of fees) for the Strategy.
- Outlook: We do not believe a recession is imminent. The decline in inflation has been welcome and consumer sentiment finished the year strong.
Market Backdrop
Falling inflation, resilient consumers, and stabilizing corporate profits supported economic growth.
- Global economies felt a boost from easing inflation and strong job markets, as well as healthy global trade and tourism.
- 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.
U.S. stocks were up more than 25%2 in 2023 led by growth3 and technology stocks.4 Interest rates fell, giving investors a more positive long-term outlook for growth stocks. Technology stocks benefited from enthusiasm for emerging technologies.
Strategy Performance
Returns were similar to the Fidelity U.S. Large Cap IndexSM (pre-tax, net of fees).
- U.S. stocks were positive in Q4 as the U.S. Federal Reserve signaled a change in monetary policy that may cut interest rates if inflation continues to ease.
- Consumer spending was resilient, while manufacturing remained weak.
- On a pre-tax, net-of-fees basis, the strategy reflected the benchmark5, which returned 12%% for the quarter.
Within large company stocks, both growth and value stocks were positive for the quarter. However, growth stocks led by a wide margin in 2023 because of the strong performance by large information technology companies, which tend to be growth oriented.
At the sector level, real estate and technology were the best performers in the fourth quarter. Real estate benefited from the Fed signaling a potential pause on interest rate hikes, while investor interest in artificial intelligence helped a narrow segment of technology companies.
We invest with a long-term view and continue to rebalance portfolios in an effort to keep pace with the index on a pre-tax basis. It is important to note that when including fees, the Strategy will generally lag the index on a pre-tax basis.
Active Tax Management*
The strategy delivered enhanced returns on an after-tax basis (net of fees) for the quarter and the year.
- Volatility dramatically decreased in the fourth quarter.6
- Our active tax management sought to take advantage of more modest volatility to seek out return opportunities.
Over the quarter, we looked for ways to reduce the impact of taxes on your account. Defensive sectors like health care and consumer staples provided some of the greatest opportunity to tax loss harvest. These sectors lagged the broader market in the quarter and for the year as investors favored mega-cap growth stocks, particularly those of large technology companies.
While working to reduce taxes is an important part of what we do for clients, our priority is maintaining the appropriate risk and return characteristics of the Fidelity U.S. Large Cap IndexSM.
Outlook
A healthy jobs market, positive wage growth, and easing inflation may continue to help consumer spending and the economy.
- Growth may slow due to expensive borrowing costs at higher interest rates. This could result in fewer purchases for large items like homes and cars.
- Nevertheless, we do not believe recession is imminent.
Recent inflation readings have fallen to levels more typical for the U.S. economy. This may have contributed to the Fed’s decision to end its campaign of interest rate hikes. Consumer sentiment has risen to some of its highest readings for 2023. Since consumer spending is a key driver of U.S. economic growth, this could prove supportive into 2024.
However, the U.S. economy also faces challenges. Manufacturing activity is in decline. Fewer job openings indicate shifts in the job market, even though unemployment remains low.
While we do not believe a recession is imminent, economic uncertainty may lead to bouts of market volatility. These are not unusual during late cycle expansions. We remain ready to take advantage of opportunities to tax-loss harvest when volatility arises. As always, helping our clients reach their financial goals remains our number one priority.
The foregoing commentary was prepared by Strategic Advisers LLC, based on information obtained from sources believed to be reliable but not guaranteed. Fidelity Personal and Workplace Advisers LLC (FPWA) has engaged Strategic Advisers LLC, its affiliate, to provide discretionary portfolio management services for Fidelity Tax-Managed U.S. Equity Index Strategy accounts, subject to FPWA’s oversight.
Strategic Advisers LLC is a registered investment advisor and Fidelity Investments company.
