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Fulcrum issues - Emerging inflation pressures and active portfolio positioning in Fidelity's Target Date strategies

Standing still could lead one to fall behind, underscoring the importance of reflecting updated research from both a long-term perspective and an intermediate-term perspective.
 

Highlights

  • A fulcrum issue today is inflation: whether it will remain low or accelerate, whether any increases are transitory or persistent, and what investors should do.
  • Scarred by experience, investors and central bankers have been trained to be vigilant about the dangers of inflation. As is common with markets and investors, the recent past is shaping perceptions about the future.
  • There is greater tolerance for large fiscal deficits. This shift in policy spans both monetary and fiscal authorities in the developed world.
  • Investors expected globalization to lower companies’ costs, but the effect on inflation has been underestimated.

Exhibit 1: U.S. price of inflation/deflation protection (5yr)

Line graph showing the costs of inflation protection and deflation protection in the prices of the consumer price index cap and floor from January 2008 to January 2021. One line shows US 4% cap 5 year (inflation protection) and the other line shows US 0% 5 year (deflation protection). Both series are at low levels after a downward trend from January 2008, with a spike in the third quarter of 2020 in the US 4% cap 5 year (inflation protection).

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