FidelityConnects: Denise Chisholm: Sector watch – March 26, 2026

[00:05:31] Pamela Ritchie: Hello, and welcome to Fidelity Connects. I'm Pamela Ritchie. It's been another volatile week for equity markets with sentiment on edge amid heightened geopolitical tensions. Many are asking is this the start of something more serious? Our next guest says when fear is high markets have historically climbed higher. In a changing energy world those shifts may be less dampening and more supportive, actually, than they appear. Joining us here today to put all this into perspective and to highlight where she is seeing opportunities across sectors is Fidelity Director of Quantitative Market Strategy, Denise Chisholm. Hello, Denise. How are you?

[00:06:11] Denise Chisholm: Hello, Pamela. I am well here in Boston. Duxbury.

[00:06:15] Pamela Ritchie: It's great to see you. We'll invite everyone to send their questions in for you over the next little bit. Let's unpack a little bit what's in the intro there, the discussion of even though there's fear, having oil prices spike, we're seeing it, we all know why, why can the market sort of climb higher than the fear itself? How, ultimately, historically does that work?

[00:06:37] Denise Chisholm: I think there are a bunch of different ways to tackle it because, obviously, we have something very different going on this time. That's the irony behind any historical analysis, it's always different. We have to be careful as investors what we think we know about what outcomes mean. The knee-jerk reaction is if there's any stress, if there's any geopolitical risk, if there's a risk to the overall economy, then therefore equity markets are at risk as well, which is always true in their own nature, which is not to say that corrections and recessions don't happen, but studying history can help you understand how often that leads to a linear conclusion. When you study, especially, wars and conflicts going back to Pearl Harbour, even through Russia invading Ukraine, you actually find an odd situation. From the time that either the bombs start flying or the boots hit the ground for the next year equity returns on average are 8%. It goes up 70% of the time historically, which is basically in line with the average. I think you have data point number one as an investor, be careful what you think you know because the glaring data from history says that more often than not things like this don't affect long term equity market returns.

[00:07:53] Pamela Ritchie: It's so interesting, and does it depend, we hear from everyone it depends on how long it lasts for. Here we have the spike, the question is does it last for, I don't know what, two months, three months, how long, ultimately, until a longer term impact is unavoidable?

[00:08:09] Denise Chisholm: That's the right question. The right sort of question back to me is, Denise, when you average all the conflicts together that doesn't include the ones that involve oil prices specifically. Look what happened in 1973 with the oil embargo. That very clearly led to a recession. Again, back to the let's go through what is quite different this time relative to the 70s, because I think we need to push back against the stagflationary expectations that I'm already hearing, and then let's talk about the duration and the math associated with what we have potentially going on.

[00:08:40] The first aspect is what's different than the '70s. In the '70s, the late '70s and early '80s, in the mid '70s, oil was a much bigger portion of our economy and the consumer's wallets. If you looked at everything consumers spent on energy, goods and services as a percentage of their overall income it was about 8%. Now we're down to 3. That is how efficient our economy has become in terms of how much oil needed for generating wage growth or generating economic growth. It's not to say that higher prices of the pump don't crimp real income growth but it is to say the throughput in terms of how it affects the consumer or the economy is very different than it was in the '70s.

[00:09:26] The supply situation is also different. At the time in the '70s OPEC was producing 2X the OECD in terms of barrels of oil. Now it's actually on par and that's a product of US shales. Now for the first time in modern history the US is actually an exporter not a net importer. Which is all to say that, of course, this all matters but I think you have to understand that the context is very, very different in terms of the impact to the overall economy. In some ways we just saw this with Russia and Ukraine. We had one of the biggest supply shocks we ever saw. We did see the same kind of spike in oil prices and yet we didn't have a recession.

[00:10:08] Pamela Ritchie: Which explains part of the reason why the Brent price is skyrocketing in a different way than WTI because the international market is more exposed to this and more worried that, ultimately, they don't have a solution in the same way as perhaps the US and North American markets, ultimately, do. You've mentioned before that it sort of depends when an oil shock happens in an economic cycle. If it happens when everyone's able to make most of their bills and they're in an okay, comfortable spot it's just less dramatic to the overall consumer and to an economy and they can kind of bump their way through it. We're okay right now. The economy is okay. There are signs that you could make a bear case in a lot of different directions but does that have a lot to do with how, ultimately, we can sort of swallow this moment?

[00:10:59] Denise Chisholm: It does. I think that's the exact right way to think about it. It's interesting when you look at the data. Forget the geopolitical risk which is more noise than signal, at least from a long term term perspective. Let's look at oil price spikes historically. We're up, let's call it 50% or more over the course of a two-month period. Let's screen all of history and say, well, when that has happened what has happened to consumption growth on a coincident basis, what's happened to corporate profits? You find something odd, which is to say that it hooks up because more often than not, which is, obviously, not to say every time, you see rises like that in an increasing demand environment. You saw it coming out of COVID, you saw it coming out of the financial crisis, and you saw it coming out of '99, right when oil prices were as low as $9. That is not our situation but what it shows you is you can't hold all else equal because, to your point, there are offsets.

[00:11:57] Think back to what happened last year. We talked about tariffs, how much are tariffs going to be, how much is going to land on the consumer? Is there an offset, is it going to be enough to be a tipping point for the consumer? At that time the offset was lower oil prices. We thought by estimate that tariffs might cost the US consumer $250 billion. Oil prices were likely to give the consumer $250 billion because they were going down about 30% year-on-year. We are right now, if you try and do that math, completely flipped.

[00:12:27] Pamela Ritchie: It's almost like it was planned.

[00:12:32] Denise Chisholm: Right. Tax rebates on an annualized basis, not just the rebates themselves that are incremental, whatever rebate, but the decline in withholdings on the tax cuts from last year, probably totaling something like 150 billion. You add in the reduction of tariffs, ironically while nobody's looking going from a 13% effective rate to right now it's like an 8% effective rate, potentially going lower, that's another 50 to 60 billion offsetting the drag from higher energy prices which, let's say, on an annual basis are totaling 150 billion right now. The question, and I didn't answer your original question and I should answer it, is, okay, well what's the level and what's the duration?

[00:13:12] From a duration perspective, let's tackle this same thing historically speaking, when do you see that typical demand destruction? Well, you see it usually when you hit 5% of your income. You say no mas, I don't have any other things to spend on anything else, this is hurting my real income enough that there is a tipping point. That, on a price basis for oil, is somewhere, depending on how it all filters through, between 135 and 150. It's higher than you think, perhaps, and it's higher than where we are now. That has to be sustained when you look through what's the filter through to inflation, which will create the crimp in real income, it's not a clear pass-through for anything that only lasts six months or under.

[00:14:01] Meaning, if the linear math is oil prices spike therefore inflation spikes therefore real incomes decline, and we can get to the Fed in a second, therefore that's the recession risk. If you look at oil price spikes from a magnitude perspective what you find is you have lower than 50/50 odds that core inflation reaccelerates. You can only get something above 50/50 odds if it lasts 9 to 12 months. That's not to say the odds are zero but it is to say that there is not an automatic pass- through, historically speaking.

[00:14:37] Pamela Ritchie: For instance, companies that are thinking about what they need to say in the next round of earnings conference calls, weeks away at this point, might not actually see it in anything that's going on with their company yet. A Fed cut or hike traditionally takes, what is it, 18 months, a year to 18 months to show up, when does oil show up for companies?

[00:14:59] Denise Chisholm: Yeah, the long lagged effects. I think in some ways very similar. If you do the math I think it's around 9 to 12 months. Again, this is my back of the envelope math that we need to try and figure out what the tipping points are, I think you need to see something like 135 to 150 last 6 months, more than 6 months, probably last 9 to 12 months, to really see an overall impact that the market is fearful of. Otherwise, it could be just the same situation with tariffs that we sort of just end up absorbing and grinding through it. Which is not to say that we grind through it in a fantastic way to say that real GDP growth is going to be deterred by this as is real income growth, it is to say that maybe the cycle continues. Then you have to go back to, and this is also your original question, what is the market discounting?

[00:15:53] Pamela Ritchie: Okay, what is the market discounting, for sure, because it can discount an awful lot. Has it done it enough, I guess, is part of the question.

[00:16:01] Denise Chisholm: If you're talking about short term indicators and being tactical and have we seen the low, I have no idea, probably not. Corrections, which I define as 10% in the S&P, more in the NASDAQ, happen most years. I don't won't to say that does not concern me but from an equity perspective that's what your base case should be going into any given year because it happens so frequently. We haven't even seen that yet so is it likely that we see it? Sure. Do I think it dilutes long term returns? Here is where my math is just different than most other people's math. I still see mathematical persistent fear in the equity markets. I still see a situation, and we can talk about private credit, and I don't think private credit is big enough to do anything relative to public credit, when you look at public credit we're not really seeing any stress. Lending has been good, now we're seeing bank loans picking up, we're seeing a liquid environment where long growth continues to grow. When you see this disconnect markets are more likely to climb the wall of worry.

[00:17:03] Think about when you go back COVID. In 2020 we saw COVID. 2021 was a quiet year, we had a good year. 2022 we saw Russia invade Ukraine and then the Federal Reserve hiked rates the most they ever had in history. Inflation resurged since we've seen in the '1970s. 2023 we saw banks fail for the first time since the 1980s. 2024 it was relatively light but there was the Japan carry trade. 2025 was the tariff tantrum. Now we have the conflict with Iran. All of those things, in some ways, carried existential risk, every single one we had which sparked a correction. That is really the problem with equity investing because the market can go up through a lot of things that we think are very existential, and, of course, there's no way you can get your arms around. The way I think about it mathematically is your biggest risk is that the market is discounting something that you don't understand and can go up through all of these existential crises.

[00:18:11] For me, that one indicator that I still gravitate to is the fear in the equity market relative to the fear in the credit market. We have not been higher now other than 2% of the time historically. We're as high as we were on my math as we were in the tariff tantrum. Now, the market hasn't even corrected yet, which is an odd starting point, which is not to say that the market won't correct but it is to say that this mathematically is a linear relationship. The more I see this the more I worry if I take my equity exposure down that all I do is dilute the potential returns, which is always the biggest risk. Equities overall return 8% on any given year, which is not to say they ever give you 8%, they're either down 20 or up 20, down 20 25% of the time and up 20 75% of the time but you have to ride through that roller coaster.

[00:19:02] The reason why most clients don't actually achieve those 8% returns is because they're too busy selling when things seem risky when the market has already discounted it, and buying it when things seemed good which is usually when the market gas discounted the good news too. Clients get 2 to 3% returns by investing in equities instead of the 8% returns because everybody's too fearful of riding through the cycle.

[00:19:27] Pamela Ritchie: You mentioned this when you listed all the different geopolitical issues over the course of sort of four or five years that the market has sort of powered its way through in its own way. It's about what the market can digest on a slower basis. That's why the spikes sometimes, or a bank failure, you're always waiting for sort of the ripple effects everywhere. This feels different because it really does have ripple effects. I mean. people in their everyday life are seeing it. This seems to be the ripple effect story, however, the suggestion is it can be absorbed and the market has already discounted for that and therefore you can kind of stay in. The structural overall theme, which we haven't discussed, is AI, is tech, essentially.

[00:20:09] Denise Chisholm: Does it go back to the, well, if oil is a little higher for longer how can you offset inflation, which is productivity, which is back to AI. Now, when I look at technology, technology, every time I think that there's other sectors that are more interesting, technology hands me a reason to think that it's still leadership. You're in the bottom third of the relative valuation when you look back to the '60s. We haven't seen relative valuation this low in over a decade for the technology sector, which is not to say that there aren't some real risks within software and are companies going to be around in the form that they are right now, but it is to say that at this point a lot of bad news is already discounted. If you think about from an odds of outperformance perspective you get over 70% odds of outperformance even if the worst things that we're talking about really come to fruition, which is companies warn, profit revisions come down, operating margins come off. All of those things that you're worried about might end up happening but it might already be in the stocks.

[00:21:09] You sort of filter through the thesis together and there's a lot of what I see as risk points to selling. There's risk points to both, there's, obviously, always downside risk that we're always thinking about, talking about, there's always upside risk as well. When you think about geopolitical conflict first data point says, well, be careful because usually it doesn't impact long term equity returns. Data point number two is, ooh, it's different this time from an oil perspective, it's not nearly as stagflationary or as linear as the '70s so think about that from that perspective. Three, the market might be discounting more than you think. All of those layers plus the fact that technology, which is former leadership, is back to valuation support kind of lines up on a just maybe be careful to react too much to data points or headlines that isn't supported with the overall historical data.

[00:22:00] Pamela Ritchie: Is it possible then that the discussion of ... you'll hear investors say, well, we almost need to sell off more, although the market has reacted and in some ways violently and we've seen that in the VIX 'cause it tells its own story, but it's not where people start to talk about capitulation where they really want to go shopping. In terms of an investment perspective, we're putting the geopolitics aside for a second here, they're not sort of seeing those levels yet. That's what you're hearing.

[00:22:30] Denise Chisholm: No, we definitely aren't. There's a bunch of different ways you can measure capitulation and in some ways the correction that I'm sort of talking about can be achieved in two ways. One, it can be very impulsive and you can get that capitulation a la the tariff tantrum. That was definitely capitulative.

[00:22:45] Pamela Ritchie: How many days with that? That was like five, maybe four, something like that.

[00:22:49] Denise Chisholm: Exactly. I think it was 20% in four or five days. Or you can have this slow grind lower that really never gets to something as punchy as 20% but seems like you never quite get to 15 either, you get to 7 to 10 and it's just a grind it out for what could be a longer duration. It's short and capitulative or it's sort of long and grindy. Either way I sort of step back and say, where are we going to be one year from here?  have no idea which path we will take in terms of it being an impulsive decline that's capitulative or a slow grind it out which just seems like we never go up either. When you look sort of over the course of a year, again, from the starting points, you have historically, with only 2% of the time, 100% odds of a higher market with an average return of something like 30%, which is not to say that that's my point of estimate of the S&P 500 but it is to say that there is upside risk here when you take a long term view.

[00:23:51] Pamela Ritchie: In the last Fed meeting we saw no movement. There's lots of discussion around the Federal Reserve for lots of different reasons. With all of that said, the inflation story leads everyone to say, oh, my goodness, interest rates will have to go up to combat inflation. I think we did see Stephen Miran yesterday announce that actually because of some inflation in the markets and some data points that actually he doesn't see rates as low at the end of the year as he once did. It's sort of feeding this inflation discussion and what the hike story is. With shocks like this do you often see a Fed hike? How are they connected or not connected?

[00:24:36] Denise Chisholm: Second order effects, great question. The interesting part when you look at the data is the Fed talks a lot, right, and I have no idea what this Fed will do and they can choose to do anything they want but the interesting thing is when you look at the data and you portion out — and if anybody wants these charts you can find them on my LinkedIn, just go to charts of the week and you can subscribe to the newsletter and then you can see the chart I'm talking about — if you look the proportions of the time that crude went up from 10, 20, above 20, above 30, above 50, all of that, you say, okay, the more crude oil goes up what is the likelihood over the course of the next six months the Federal Reserve hikes interest rates, or even coincident. You will see a steady decline over that six-month period, meaning that the bigger the inflection in oil prices the less likely the Federal Reserve has been to hike. At the point where we are now, up 50 over the course of two months, it's not zero but it's only 25%.

[00:25:32] Most Feds in history, which is not to say that this Fed has to think the same thing, but think of it the way I think of it, which is it's a tax hike on the consumer. Much like we talked about tariffs, do some prices go up, absolutely, but if you don't dump a whole lot more money on the customer, and we're not dumping money, we're talking about offsets, then it's hard to get generalized inflation in terms of all higher prices. If I need to spend more money on oil and gas then I'm going to spend less money on insert XYZ, which means I have lower marginal propensity to consume, they have lower marginal propensity to price, and therefore you don't see this generalized level of inflation rise. Historically speaking, to boil it down, the Fed has usually looked through this.

[00:26:20] Pamela Ritchie: In Canada it's not the exact same discussion but the central bank has to answer all these questions as well and it's very hard on parts of the economy to have a shock like this, and the tariff shock is its own shock, but net-net we sell a lot of oil so it works out at the very high GDP level in the end.

[00:26:44] Denise Chisholm: That's the correct way to think of it, too, because when I did that offset math it doesn't mean that every income cohort or every income decile is benefiting. In fact, it's not. I think most of the beneficiaries are above the 50th percentile in terms of their income. This is higher oil prices, higher tariffs, we're massively regressive. That is not offset by the tax rebates. In aggregate, when you look at the aggregation, which is, I think, that how we want to think about the aggregate earnings and the aggregate stock there is sort of that mathematical offset that you always need to be conscious of.

[00:27:19] Pamela Ritchie: It's really interesting. We haven't spoken about the consumer and sentiment, well, sentiment recently due to oil and how that's hitting everyone, but at one point consumer discretionary, we're going to talk about the consumer tomorrow with Aneta Wynimko, one of your colleagues in the UK, one of the discussions I think she had mentioned that she wants to talk about is that it's sort of at trough levels. Parts of that are at trough so they're kind of interesting. I wanted to ask you with this oil situation layered on top of it, does it push you further into trough? How is the consumer, what is sort of the sentiment story? Does it look interesting for you in the sectors that you're looking at?

[00:28:01] Denise Chisholm: I think it's interesting in terms of they're miserable but spending, which is not something that you you usually see historically, although mathematically you know that it could relate like that in the sense that spending is correlated when sentiment rises but not necessarily when it falls, which means that statistically you could be miserable spenders historically speaking. You just most are right now. What matters most is not necessarily sentiment, it is what will ultimately real incomes be, what are those offsets? All of those trough indicators, to your point, are usually bullish trough indicators for things like housing, for things like consumer discretionary. Housing stocks have sold off a lot on the pop in mortgage rates which is the pop on inflation fears when we price in the Federal Reserve raising interest rates. I'm not sure that's going to come to fruition. You couple that with the fact that, like I said, home builders on a relative price-to-book basis are still bottom decile, or certainly bottom quartile, if not bottom decile, and you usually have a positive risk-reward, which is not to say that we need to go up from here but it is to say that statistically I think downside is limited, and if we're being shortsighted around what the crimp in oil prices might be, I mean, one thing we didn't talk about was be careful chasing because supply shocks tend to unwind.

[00:29:29] Pamela Ritchie: I was just going to say before I ask you, go ahead and take some water if you want, before I ask about your top three and bottom three sectors as they stand, you've mentioned tech, but I did want to ask you about that risk of chasing. If  you want to invest in oil and thought, no, no, it hasn't done anything for a long, long time, there's probably a lot of people thinking this is where I want to put some money to work right now. Just talk about that. And at this point it spiked, now what?

[00:29:59] Denise Chisholm: In some ways. Just be careful about what I say since energy was my bottom three sectors coming into this year, and that was clearly wrong. The question is, okay, we're wrong a lot. I think the best people in the business are right, what do they say, 52% of the time.

[00:30:12] Pamela Ritchie: We didn't see this coming.

[00:30:14] Denise Chisholm: [crosstalk] more than that. The question is, okay, what do you do now? If you think about this as a supply shock and you say, okay, if we say 50% over the course of two months, that's the supply shock, how do we usually end up the next year? We usually end with lower oil prices, not higher oil prices and with underperformance of energy stocks, not outperformance of energy stocks, which is not to say under the path, which is not to say that oil has peaked or energy stocks have peaked. But energy stocks will peak on a relative basis before oil peaks on a relative basis so be conscious of that. I see a real high whipsaw risk when you look at supply shocks because, ultimately, when you take a longer term view of a year long, we saw this when Russia invaded Ukraine, we saw the same situation, oil prices ended up lower because, ultimately, unless you're in this '70s regime, which I do not think we are, there can be no pass-through and higher prices end up curing higher prices.

[00:31:15] Pamela Ritchie: It's so interesting because the whipsaw ... there was some discussion, you were going to talk about this, and you are talking about this, but that there indeed could even be a rush for the door if you see oil prices sort of ... I guess that is the whipsaw, isn't it? There's a rush to get in when you see them going higher and then a rush to get out. There's dangers within that so stay the course, is that sort of the, stay the course?

[00:31:41] Denise Chisholm: Yes, and in some ways that is what I come back to a lot, which is to say that the only ones who get hurt on the roller coaster are the jumpers. I think it's very difficult to sort of chase oil here unless you know something that I do not know, which is exactly how this all ends. I will not say that I know that. I will now play geopolitical strategist on TV.

[00:32:05] Pamela Ritchie: Tell us the top three, bottom three. You mentioned tech, I think that's at the top.

[00:32:10] Denise Chisholm: Is tech at the top? Probably. I would say right close next to it is industrials, which we have talked about, because I do not think that this dissuades the manufacturing recovery that we have started to see inflect, which is coincident with median earnings. At the level oil prices are now, again, we're not seeing any problem with what continues to be a grind it out, pretty good inflection in the manufacturing economy, which is not to say that there's strength but a pretty good inflection. That usually means things like staples and utilities, which aren't actually behaving particularly well in this tape, are not going to be your defensive options. Something like geared towards that maybe durable industrial recovery, like industrials, like transportation stocks, like machinery stocks, are going to be the better risk-reward at this juncture. Always think, just regardless of the market, what you want to own within the market, it's interesting to think about if you are fearful of a recession one of the things that you want to do statistically is look for stocks that have already priced it.

[00:33:18] We just talked about technology being in the bottom tercile of its range on relative valuation. Software sort of is priced for its own great financial crisis in some ways. You usually don't see a disconnect like that other than things like a financial crisis. Homebuilding is like that and pockets of industrials are like that. As well, manufacturing has been in its own malaise for three years. I would say technology, industrials, and then I would say the housing portion of consumer discretionary still is an opportunity for me when I look at that sort of risk-reward of potentially lower interest rates over time as disinflation, I think, continues, coupled with the fact that I do think the housing stocks have discounted what looks to me like a much harder landing than we might have ultimately achieved.

[00:34:02] Pamela Ritchie: Amazing. Okay, so top three, bottom three then are still...?

[00:34:07] Denise Chisholm: Energy, don't chase, be careful chasing. Consumer staples, for sure, which is in some ways in the crosshairs in terms of their ability to price. Historically speaking they were your defence and offence in the '80s. We talk about technology being that now. Technology is the consumer staples of the '80's, I think. It's relatively unaffected from a sector perspective versus other sectors in terms of their ability to sell goods and have positive free cash flow and margin. Consumer staples and I would also add in utilities, any defence gets me nervous, coupled with energy.

[00:34:46] Pamela Ritchie: They have seen price spikes themselves over the course of the last little while so maybe that's priced in. Denise Chisholm, we are delighted always to speak to you. You set us straight. Thank you for joining us here today and have a great rest of your day.

[00:34:58] Denise Chisholm: Always great to be here. You too.

[00:35:00] Pamela Ritchie: That's Denise Chisholm joining us from Boston, the Boston area today. Coming up tomorrow portfolio manager Aneta Wynimko. She offers a refined look at the latest shifts in consumer taste, she has lovely taste herself, and brand power while unveiling the investment themes capturing her attention in the Fidelity Global Consumer Brands Fund.

[00:35:21] On Monday you don't want to miss our conversation, this is with Peter Bowen, he's Vice President of Tax and Retirement Research. The Canada Revenue Agency has announced major reversals of some of its long-standing positions on the GST/HST treatment of mutual fund trailing commissions. To help you understand the changes, all that you need to put into context, you can join Peter, he'll break down the implications. This webcast is going to be presented, this is on Monday in English, and feature live French, Mandarin, and Cantonese audio interpretation.

[00:35:50] For next Tuesday we'll be discussing with Fidelity Global Bond Fund portfolio manager, this is Mike Foggin, he joins us from London. Timely look at the key trends shaping the global bond story, markets themselves, where he's identifying potential opportunities for the fund. One quick thing that he'll certainly be discussing is, obviously, the interest rate policy but the appetite for bonds right now, the attractiveness of them, he'll go into detail how he sees that. You can join us for that. Thanks for watching here today. We'll see you soon. We'll see you in the days to come. I'm Pamela Ritchie.