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Fidelity Strategist: Market Used To DC Gridlock

Q: What's the key reason that you're optimistic?

A: We're starting to achieve a level of clarity we haven't had in a long time, and that's really powerful for stocks. For starters, there's less uncertainty in Washington. In President Obama's first term, there were many crises and several industries came under increasing scrutiny and regulation. With so much uncertainty, companies behaved conservatively. They stopped hiring, cut capital spending plans and they didn't raise dividends.

With the election behind, we know we'll continue to have Democrats and Republicans each controlling one chamber of Congress, and a president entering his second term. We'll still have partisanship. But we're starting to get clarity around policies on financial services, energy and other areas. And we've got clarity about tax policy. We haven't had that in years.

Q: What makes you optimistic about the economy?

A: We're seeing a recovery in the housing market, and that matters to everybody, from corporate CEOs to consumers. A rising housing market is a powerful backdrop to general economic activity and the stock market broadly. Confidence matters a ton. Stocks are rallying this year because the market is operating on a longer time horizon, now that there's more clarity.

Q: But unemployment remains high, and there are other troubling signs in the economy.

A: Yes, but it's better when you look at what drives the stock market, and that's corporate earnings. Stocks continue to be priced inexpensively relative to the earnings they generate and we're seeing decent earnings growth. And America's competitiveness is very strong. Natural gas is incredibly cheap, and we've got an efficient and strong labor force. We've had lots of productivity improvements in corporate America and modest wage growth.

Q: How will uncertainty about fiscal issues in Washington affect the markets in the next few months?

A: There's incredible partisanship, which is obviously dysfunctional. When we had the debt ceiling debate and resulting credit downgrade in the summer of 2011, stocks fell about 20 percent in short order. But there was no comparable decline leading up to the recent fiscal cliff deal. Washington has found a new way to negotiate and the markets seem to be getting used to it.

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