Fidelity Capital Markets (FCM)Market Update

Tom DeMarco, CFAIlya Perlovsky, CFA

January 2021

Fidelity Capital Markets is a division of National Financial Services LLC, Member NYSE, SIPC868412.3.0

Global reflation indictors have recovered to levels above where they began 2020…

While the 10Yr US Treasury yield has not…

Will interest rates follow suit in 2021?

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Global Reflation Proxiesvs. 10Yr US Treasury Yield

Global PMICopper/GoldDow Transportation Average/Dow Industrial Average10Yr Breakeven Inflation10Yr US Treasury Yield (rhs)

Source: Bloomberg Finance LLP, FCM; Dec. 7, 2020

Prior to the 2020 recession the yield curve inverted, a historically reliable warning…

But since the Fed cut rates it has been steepening, indicating a new cycle is underway heading into 2021…

The key question for investors is how far will the rise in rates go?

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5Yr - 2Yr US Treasury Curve

2s5s Spread (basis points) 200wk moving avg

50wk moving avg

Source: Bloomberg Finance LLP, FCM; Dec. 7, 2020Note: Gray bars denote US recessions

The amount of negative yielding debt moved to a record in 2020…

Even if interest rates rise in 2021 the sheer amount of negative yielding debt abroad may exert downward pressure on US yields…

A key question for investors is how to allocate to fixed income in a low/negative yielding world.

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Negative Yielding Debtin Bloomberg Barclays Global Agg Index

Market Value % of Total Index (rhs)

Source: Bloomberg Finance LLP, FCM; Dec. 7, 2020

Global central banks added over $8 trillion in liquidity in 2020…

But the 12-month run-rate is expected to fall to $3.5 trillion in 2021…

How will such a sharp contraction in the flow of QE affect markets?

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Central Bank Total AssetsRolling 12 Month Change, $ trillions

EM

BOE

ECB

BOJ

SNB

Fed

Total

Source: Bloomberg Finance LLP, FCM; Dec. 7, 2020EM=emerging markets (Venezuela, Brazil, Turkey, S. Africa, Saudi Arabia, Russia, Mexico, Indonesia, China, India; BOE=Bank of England; ECB=European Central Bank; BOJ=Bank of Japan; SNB=Swiss National Bank; Fed=Federal Reserve.

After spending 4 years expanding, in 2020 the deficit increased again, to an unprecedented 16% of GDP…

Under current law the deficit is expected to shrink in 2021…

How will such a contraction in fiscal support affect markets?

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Federal Deficit as % of GDPvs. Change in Deficit

Fiscal Drag (decrease in deficit/GDP) Fiscal Boost (increase in deficit/GDP)

Federal Deficit as % of GDP

Source: Federal Reserve Board, CBO, FCM; Dec. 7, 2020

Consumer price indices like the CPI showed deflation in the wake of the pandemic in 2020…

But in early 2021 the year-over-year comparisons may show increases over 3%…

The key question for markets will be where do consumer prices head in the 2nd half, once the base effects wear off.

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US Consumer Price Index Y/Y%

CPI Y/Y% model based on relationship to SPGSCI, ISM, M1 (extrapolated into 2021 assumingcurrent prices)

CPI Y/Y%

Source: Bloomberg Finance LLP, FCM; Dec. 7, 2020SPGSCI: S&P Goldman Sachs Commodity Index. M1: U.S. money supply. ISM: ISM Manufacturing PMI.

The recession-induced decline in corporate earnings in 2020 was consistent with prior downturns…

Current 12-month forward estimates indicate an earnings recovery in 2021…

Will companies continue to trim headcount in order to maintain margins?

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S&P 500 Earnings Per Share

S&P 500 Trailing 12m EPS Y/Y% (rhs) S&P 500 Trailing 12m EPS

12m Forward EPS Estimate

Source: Bloomberg Finance LLP, FCM; Dec. 7, 2020Note: Gray bars denote US recessions

The rate of business failures increased sharply in 2020…

And while the default rate is a lagging indicator, it is expected to pick-up further in 2021…

The key question for investors is how severe the default cycle will be. 0

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Credit Spread on Speculative Grade Debt vs Default Rate

US Corporate Speculative Grade Trailing 12m Default RateEstimated Default RateSpeculative Grade Credit Spread (rhs)Estimated Credit Spread (rhs)

Source: Bloomberg Finance LLP, Moody's, FCM; Dec. 7, 2020Credit spread is the option-adjusted spread from the ICE BofA US High Yield Index

Corporate debt has increased more than 50% since the last recession and federal debt has more than doubled…

While municipal debt outstanding has remained nearly unchanged…

With muni issuance barely keeping pace with maturing debt, where can investors find value?

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Total Debt Outstanding, $ trillions

Nonfinancial Corporate Federal Government Municipal

Source: Federal Reserve Board, FCM; Q2 2020

Taxable bonds were 1/3 of gross issuance in 2020 and contributed more to overall size of market than tax-exempts…

The trend toward taxable issuance is expected to continue in 2021…

A key question for investors is what role do taxable munis play in portfolios going forward?

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Municipal Market Total Net Issuance$ billions

Tax-Exempt Taxable + AMTSource: Bloomberg Finance LLP, FCM; Nov 20, 2020AMT=Alternative Minimum Tax. Total issuance of notes and bonds less amounts called and matured; 2020 annualized as of Nov. 30, 2020; 2021 FCM estimate.

FCM Outlook Summary Table

and

Investment Grade Municipal and Corporate Sector Outlooks

FCM 2021 outlook is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities and should not be construed as investment advice.

Weightings in the sector outlooks are relative to the ICE BofA US Municipal Securities Index, ICE BofA Broad US Taxable Municipal Securities Index, ICE BofA US Corporate Index, and ICE BofA US High Yield Index, as applicable.

IG = Investment Grade. Credit rating in the top four rating categories AAA, AA, A, BBB.

HY = High Yield. Credit rating below the BBB category.

Important InformationFidelity Capital Markets is a division of National Financial Services LLC, a Fidelity Investments company and a member of NYSE and SIPC.

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. Views expressed are as of 12/10/2020, 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 speakers and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information. Investment decisions should be based on an individual’s own goals, time horizon, and tolerance for risk. Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer, accountant, or other advisor before making any financial decision.

References to specific securities or investment themes are for illustrative purposes only and should not be construed as recommendations or investment advice. This information must not be relied upon in making any investment decision. Fidelity cannot be held responsible for any type of loss incurred by applying any of the information presented. These views must not be relied upon as an indication of trading intent of any Fidelity fund or Fidelity advisor.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

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. Any fixed income security sold or redeemed prior to maturity may be subject to loss. The municipal market can be affected by adverse tax, legislative, or political changes, and by the financial condition of the issuers of municipal securities. High-yield/non-investment-grade bonds involve greater price volatility and risk of default than investment-grade bonds.

Past performance is no guarantee of future results.

Indexes are unmanaged. It is not possible to invest directly in an index.

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Important InformationTerms and DefinitionsDow Jones Transportation Average (Dow Transportation Average) is a 20-stock, price-weighted index that measures the performance of some of the largest U.S. companies within the transportation industry group.

Dow Jones Industrial Average (Dow Industrial Average) is a 30-stock, price-weighted index that measures the performance of some of the largest U.S. companies. The index provides suitable sector representation with the exception of the transportation industry group and utilities sector which are covered by the Dow Jones Transportation Average and the Dow Jones Utility Average respectively.

JPMorgan Global Manufacturing PMI (Global PMI) is a Diffusion Index that is reported monthly by JP Morgan. Values above 50 imply expansion and values below 50 imply contraction.

The breakeven inflation rate represents a measure of expected inflation derived from 10-Year Treasury Constant Maturity Securities and 10-Year Treasury Inflation-Indexed Constant Maturity Securities. The latest value implies what market participants expect inflation to be in the next 10 years, on average.

The Bloomberg Barclays Global Aggregate Index is a flagship measure of global investment grade debt from twenty-eight local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. There are four regional aggregate benchmarks that largely comprise the Global Aggregate Index: the US Aggregate, the Pan-European Aggregate, the Asian-Pacific Aggregate, and the Canadian Aggregate Indices. The Global Aggregate Index also includes Eurodollar, Euro-Yen, and 144A Index-eligible securities, and debt from five local currency markets not tracked by the regional aggregate benchmarks (CLP, COP, MXN, PEN, and ILS). A component of the Multiverse Index, the Global Aggregate Index was created in 2000, with index history backfilled to January 1, 1990.

The federal surplus or deficit as % of GDP represents the difference between government revenues and government expenditures. A budget surplus would mean revenues are higher than expenditures. A deficit means expenditures are greater than revenues. Technically, the budget surplus or deficit is the difference between actual cash collections from taxes and “budgeted” spending, not the actual spending that occurs during the fiscal year. Some expenditures are “off the books” and not reflected in the “official” deficit figure, but added to the national debt nevertheless.

The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 11.2 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 4.6 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.

Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. Changes in the CPI are used to assess price changes associated with the cost of living; the CPI is one of the most frequently used statistics for identifying periods of inflation or deflation. Food and energy prices are exempt from the calculation for Core CPI because their prices are considered too volatile. Core CPI is thought to be an indicator of underlying long-term inflation.

ISM Manufacturing PMI is a Diffusion Index that is reported monthly by Institute for Supply Management in the U.S. Values above 50 imply expansion and values below 50 imply contraction.

Important InformationTerms and DefinitionsThe S&P GSCI® is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. The returns are calculated on a fully collateralized basis with full reinvestment. The combination of these attributes provides investors with a representative and realistic picture of realizable returns attainable in the commodities markets. Individual components qualify for inclusion in the S&P GSCI® on the basis of liquidity and are weighted by their respective world production quantities. The principles behind the construction of the index are public and designed to allow easy and cost-efficient investment implementation. Possible means of implementation include the purchase of S&P GSCI® related instruments, such as the S&P GSCI® futures contract traded on the Chicago Mercantile Exchange (CME) or over-the-counter derivatives, or the direct purchase of the underlying futures contracts.

M1 money supply includes funds that are readily accessible for spending. M1 consists of: (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler's checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts. Seasonally adjusted M1 is calculated by summing currency, traveler's checks, demand deposits, and OCDs, each seasonally adjusted separately.

U.S. High Yield Default Rate is the number of Moody’s-rated U.S. corporate issuers with speculative grade ratings at the time of default, summed over a trailing 12-month period and divided by the total number of Moody’s-rated U.S. corporate issuers with speculative grade ratings. The definition of default is applicable only to debt or debt-like obligations (e.g., swap agreements). Four events constitute a debt default under Moody’s definition: 1) a missed or delayed disbursement of a contractually-obligated interest or principal payment (excluding missed payments cured within a contractually allowed grace period), as defined in credit agreements and indentures; 2) a bankruptcy filing or legal receivership by the debt issuer or obligor that will likely cause a miss or delay in future contractually-obligated debt service payments; 3) a distressed exchange whereby (a) an issuer offers creditors a new or restructured debt, or a new package of securities, cash or assets, that amount to a diminished value relative to the debt obligation’s original promise and (b) the exchange has the effect of allowing the issuer to avoid a likely eventual default; 4) a change in the payment terms of a credit agreement or indenture imposed by the sovereign that results in a diminished financial obligation, such as a forced currency re-denomination (imposed by the debtor, or the debtor’s sovereign) or a forced change in some other aspect of the original promise, such as indexation or maturity.

Option-adjusted spread (OAS) is typically represented in basis points. OAS is a methodology using option-pricing techniques to value the embedded options risk component of a bond's total spread. Embedded options are call, put, or sink features of bonds. The total spread of the security is adjusted by removing all options to arrive at an OAS. The spread represents the interpolated yield spread to a selected “risk-free” yield curve.

Important InformationICE BofAML US High Yield Index tracks the performance of US dollar denominated below investment grade corporate debt publicly issued in the US domestic market. Qualifying securities must have a below investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity as of the rebalancing date, a fixed coupon schedule and a minimum amount outstanding of $250 million. In addition, qualifying securities must have risk exposure to countries that are members of the FX-G10, Western Europe or territories of the US and Western Europe. The FX-G10 includes all Euro members, the US, Japan, the UK, Canada, Australia, New Zealand, Switzerland, Norway and Sweden. Original issue zero coupon bonds, 144a securities (both with and without registration rights), and pay-in-kind securities (including toggle notes) are included in the index. Callable perpetual securities are included provided they are at least one year from the first call date. Fixed-to-floating rate securities are included provided they are callable within the fixed rate period and are at least one year from the last call prior to the date the bond transitions from a fixed to a floating rate security. Contingent capital securities (“cocos”) are excluded, but capital securities where conversion can be mandated by a regulatory authority, but which have no specified trigger, are included. Other hybrid capital securities, such as those issues that potentially convert into preference shares, those with both cumulative and noncumulative coupon deferral provisions, and those with alternative coupon satisfaction mechanisms, are also included in the index. Securities issued or marketed primarily to retail investors, equity-linked securities, securities in legal default, hybrid securitized corporates, eurodollar bonds (USD securities not issued in the US domestic market), taxable and tax-exempt US municipal securities and DRD-eligible securities are excluded from the index. Index constituents are market capitalization weighted. Accrued interest is calculated assuming next-day settlement. Cash flows from bond payments that are received during the month are retained in the index until the end of the month and then are removed as part of the rebalancing. Cash does not earn any reinvestment income while it is held in the index. Information concerning constituent bond prices, timing and conventions is provided in the ICE BofAML Bond Index Guide, which can be accessed on our public website (www.mlindex.ml.com), or by sending a request to iceindices@theice.com. The index is rebalanced on the last calendar day of the month, based on information available up to and including the third business day before the last business day of the month. New issues must settle on or before the calendar month end rebalancing date in order to qualify for the coming month. No changes are made to constituent holdings other than on month end rebalancing dates. Inception date: August 31, 1986.

ICE BofAML US Corporate Index tracks the performance of US dollar denominated investment grade corporate debt publicly issued in the US domestic market. Qualifying securities must have an investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity as of the rebalancing date, a fixed coupon schedule and a minimum amount outstanding of $250 million. Original issue zero coupon bonds, 144a securities (with and without registration rights), and pay-in-kind securities (including toggle notes) are included in the index. Callable perpetual securities are included provided they are at least one year from the first call date. Fixed-to-floating rate securities are included provided they are callable within the fixed rate period and are at least one year from the last call prior to the date the bond transitions from a fixed to a floating rate security. Contingent capital securities (“cocos”) are excluded, but capital securities where conversion can be mandated by a regulatory authority, but which have no specified trigger, are included. Other hybrid capital securities, such as those issues that potentially convert into preference shares, those with both cumulative and non-cumulative coupon deferral provisions, and those with alternative coupon satisfaction mechanisms, are also included in the index. Equity-linked securities, securities in legal default, hybrid securitized corporates, eurodollar bonds (USD securities not issued in the US domestic market), taxable and tax-exempt US municipal securities and DRD-eligible securities are excluded from the index. Index constituents are market capitalization weighted. Accrued interest is calculated assuming next-day settlement. Cash flows from bond payments that are received during the month are retained in the index until the end of the month and then are removed as part of the rebalancing. Cash does not earn any reinvestment income while it is held in the index. Information concerning constituent bond prices, timing and conventions is provided in the ICE BofAML Bond Index Guide, which can be accessed on the public website (www.mlindex.ml.com), or by sending a request to iceindices@theice.com. The index is rebalanced on the last calendar day of the month, based on information available up to and including the third business day before the last business day of the month. New issues must settle on or before the calendar month end rebalancing date in order to qualify for the coming month. No changes are made to constituent holdings other than on month end rebalancing dates. Inception date: December 31, 1972.

Important InformationICE BofAML US Municipal Securities Index tracks the performance of US dollar denominated investment grade tax exempt debt publicly issued by US states and territories, and their political subdivisions, in the US domestic market. Qualifying securities must have at least one year remaining term to final maturity, at least 18 months to final maturity at the time of issuance, a fixed coupon schedule and an investment grade rating (based on an average of Moody’s, S&P and Fitch). Minimum size requirements vary based on the initial term to final maturity at time of issuance. Securities with an initial term to final maturity greater than or equal to one year and less than five years must have a current amount outstanding of at least $10 million. Securities with an initial term to final maturity greater than or equal to five years and less than ten years must have a current amount outstanding of at least $15 million. Securities with an initial term to final maturity of ten years or more must have a current amount outstanding of at least $25 million. The call date on which a pre-refunded bond will be redeemed is used for purposes of determining qualification with respect to final maturity requirements. Original issue zero coupon bonds are included in the Index. Taxable municipal securities, 144a securities and securities in legal default are excluded from the Index. Index constituents are market capitalization weighted. Accrued interest is calculated assuming next-day settlement. Cash flows from bond payments that are received during the month are retained in the index until the end of the month and then are removed as part of the rebalancing. Cash does not earn any reinvestment income while it is held in the index. Information concerning constituent bond prices, timing and conventions is provided in the ICE BofAML Bond Index Guide, which can be accessed on our public website (www.mlindex.ml.com), or by sending a request to iceindices@theice.com. The index is rebalanced on the last calendar day of the month, based on information available up to and including the third business day before the last business day of the month. New issues must settle on or before the calendar month end rebalancing date in order to qualify for the coming month. No changes are made to constituent holdings other than on month end rebalancing dates. Inception date: December 31, 1988.