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Timely tips from five pros

Five years after the financial crisis: slow growth, low rates, but opportunities abound.

Video highlights: Latest investing ideas

What’s next for stocks, trends to watch, and how the Fed is impacting markets. Watch the videos.

Five years ago, the financial crisis threw the investment markets into turmoil. Credit markets were virtually frozen, stock prices dove, and some people questioned the sustainability of the financial system. Today, the economy is still sluggish, but many of the macro-level risks seem to have subsided. U.S. companies are less leveraged, the housing market is recovering, and stocks have hit new all-time highs.

Although investors may not be worrying about the future of the American financial system, new questions have arisen. Low rates have income-oriented investors wondering where to find yield, the unprecedented role of central banks has some people concerned about the sustainability of today’s rally, and higher stock prices have investors questioning what to buy.

Viewpoints gathered together five Fidelity portfolio managers for a discussion of these questions. They offered their thoughts on why interest rates may stay low for long, reasons to consider yield from global dividend-paying stocks, high-yield and corporate bonds, and the case for consumer stocks, housing, and tech names.

Investing in a low-volatility world

Over the last five years, there’s been a lot of healing. Some of the extreme volatility we experienced has subsided, and we’re seeing a return to some risk taking on the part of shareholders. Overall, I am modestly “risk on” in the funds I manage.

The main drivers of that optimism for risk assets are sustained economic growth in the U.S. and central bank policy. Central banks around the world have thrown a volatility blanket over the markets. I think people in the past have underestimated the power of central banks. As long as the economy remains in expansion mode and the central banks continue to push as hard as they have been, I don’t see the market falling significantly in the near term.

So that begs the question, what is the endgame for quantitative easing? Personally, I wouldn't be surprised if the size of the Fed’s balance sheet remains inflated above historical norms for a really long time. Consequently, I don’t see an end to the Fed’s quantitative easing any time soon. However, we could see an adjustment in the pace of QE purchases. In fact, the Federal Reserve opened the door to a more flexible policy with its May statement. It’s my opinion that economic conditions still appear far removed from the sustainable gains the Fed has targeted in order to change tack. Nonetheless, with more uncertain monetary policy, volatility has been on the upswing.

With the specter of increasing volatility, investors need to be sure that they know what they own and that their managers are being disciplined in what they’re buying. There’s a lot of incentive right now to reach for return, especially yield. But investors who do that now, while volatility is still relatively low, might be unpleasantly surprised at how their portfolio performs when volatility spikes.

Favoring yield, but no options are cheap

I don’t see any income-producing asset classes that I would consider inexpensive. Income in general is fairly valued to expensive as a result of central bank policy and demographic forces, particularly the retirement of the baby boomers. So we have to choose income assets that give us the best value on a relative basis.

I think today’s environment argues for the prudent use of higher-yielding options. While the prices for all kinds of bonds are elevated, the macro climate looks constructive. Economic growth is shallow but stable, corporations have strong balance sheets and good earnings—they can afford their debt—and tail risk is muted. So while I don’t think we’ll see a lot of price appreciation, I don’t think we’ll see significant depreciation either. Or if we do see a downdraft, it could be short lived. If that is the case, returns are likely to come from income, so I’m favoring bond assets that pay relatively higher yields.

For example, I’m overweight in high-yield bonds versus Treasuries. High yield pays an average coupon of 7.50%, and I don’t see anything like that anywhere else. Likewise, emerging-market debt is a more modest overweight as the market has recently consolidated.

Caution on preferred stock and commodities

While I favor yield right now, I don’t buy it blindly. For example, preferred stock has been paying a yield of about 5%, on average. But about one-third of preferred stocks are past their call date, and the market is priced at a premium. So if your preferreds are called, you might get a price lower than you paid—and that loss will eat up a lot of the income you gain from them.

I'm also underweight in commodities, because they pay no income and I think the supercycle for them may have turned. In the past 10 years, we’ve seen commodities run wild, driven by emerging markets like China. But as these economies move toward a consumer-driven model, I don’t expect they are going to buy commodities at the same high rate, so the demand side should cool. On the supply side, the shale revolution in North America is easing prices in the energy sector. Owning commodities as a hedge against inflation may still make sense, but I don’t think they’re a good tactical play right now.

Related funds

  • Joanna Bewick, Fidelity® Strategic Income Fund (FSICX), Fidelity® Strategic Dividend & Income Fund (FSDIX), and Fidelity® Strategic Real Return Fund (FSRRX)
  • Sonu Kalra, Fidelity® Blue Chip Growth Fund (FBGRX)
  • Tom Soviero, Fidelity® Leveraged Company Stock Fund (FLVCX)
  • Ramona Persaud, Fidelity® Global Equity Income Fund (FGILX)
  • David Prothro, Fidelity® Corporate Bond Fund (FCBFX)

Learn more

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The views and opinions expressed by the Fidelity speakers are their own and do not necessarily represent the views of Fidelity Investments or its affiliates. Any such views are subject to change at any time based on 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 speakers can be held responsible for any direct or incidental loss incurred by applying any of the information offered. Please consult your tax or financial adviser for additional information concerning your specific situation.
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The stocks mentioned are not necessarily holdings invested in by FMR LLC. References to specific company stocks should not be construed as recommendations or investment advice.
As of April 30, 2013, Fidelity Blue Chip Growth Fund held Home Depot Inc. 1.9%, Lowe’s 0.749%, Ford 0.186%, Whirlpool 0.619%, Starbucks 1.255%, Amazon 1.664%, Netflix, Inc. 0.377%, and Google 5.42%.
The top ten holdings of Fidelity Blue Chip Growth Fund as of March 31, 2013 were Google Inc. A, Apple Inc., Gilead Sciences Inc., QUALCOMM Inc., Amazon.com Inc., Procter & Gamble Co., Home Depot Inc., Coca-Cola Company, Green Mountain Coffee Roasters, Inc., and Philip Morris International Inc. Top ten represent 24.26% of the fund.
As of January 31, 2013, Fidelity Leveraged Company Stock Fund held Comcast Corp. Class A 2.720%, Cinemark Holdings, Inc. 1.6%, Lyondell 8.4%, General Motors 2.8%, Ford 1.9%, General Electric 0.532%, The Dow Chemical Company 0.58%, and Tenet Healthcare 2.2%.
The top ten holdings of Fidelity Leveraged Company Stock Fund as of March 31, 2013 were Lyondell, Basell Inds Class A, Service Corp International Inc., AES Corp., Tenet Healthcare Corp., General Motors Co., Ford Motor Co., HollyFrontier Corp., Gamestop Corp. Class A, and Rock-Tenn Company Class A. Top ten holdings represent 31.37% of the fund.
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