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A message from the Investment Management Team of Strategic Advisers LLC
By Brian Enyeart, CFA®,* President, Strategic Advisers LLC- First Quarter 2020
THE COVID-19 OUTBREAK LED TO MARKET VOLATILITY
Global stocks fell amid concerns surrounding the impact of the COVID-19 outbreak on corporate earnings. Investment grade bonds rose, but experienced unusual volatility.
U.S. ECONOMY STANDS AT THE ONSET OF RECESSION
We believe the U.S. economy is likely to contract, as efforts to manage the spread of the virus have led to a sharp drop in demand for goods and services from consumers and businesses.
WATCHING FOR EARLY SIGNS OF MARKET STABILIZATION
We’re closely watching efforts to manage the spread of the virus and for signs of economic activity, as positive developments may lead to greater stability in stock and bond markets.
Last quarter, U.S. stocks fell 21.0%1 while bonds experienced unusual volatility amid market concerns that efforts to suppress the spread of COVID-19 would lead to slower economic growth. This market volatility led to a difficult quarter for many client accounts. However, over the last few years, we had reduced exposure to riskier assets such as stocks within client portfolios. We took these actions because we believed economic growth was maturing and the United States was moving into the late phase of the business cycle. As a result of these actions, well-diversified client accounts experienced less volatility than they may have otherwise.
We now believe that the U.S. economy is at the onset of a recession. Therefore, towards the end of the quarter, we further reduced exposure to both U.S. and international stocks within well-diversified client accounts, while allocating more to investment grade bonds. Historically, stocks have experienced greater volatility during recessions, followed by strong recoveries as the economic backdrop has improved. Meanwhile, bond investments may offer stability for investors during periods of stock market volatility.
Periods of heightened market volatility also provided opportunities for us to rebalance client accounts. Our disciplined rebalancing process helped to:
Over the last few years, we have emphasized allocations to growth, quality, and large company stocks.
Here’s how those areas of the market performed during the quarter:
Over the quarter, international developed markets and emerging markets trailed U.S. stocks, returning -22.8%6 and -23.6%7, respectively.
Within our allocations to international stocks:
A combination of lower interest rate policies by the U.S. Federal Reserve and falling investor expectations for U.S. economic growth led to lower bond yields. Lower yields helped investors as bond prices rose.
We are closely following efforts to manage the outbreak, and the overall economy, for signals that some of the economic disruptions due to the virus may be behind us. Some key areas that we continue to monitor include:
We believe markets may remain volatile. The COVID-19 outbreak has led to uncertainty surrounding the pace of economic growth and the outlook for corporate profits. However, we have experienced markets like these before in the face of many past economic challenges. We are confident that the U.S. economy will eventually find its footing, leading to an eventual early cycle expansion. Through it all, we remain committed to taking a patient, disciplined approach to managing your investments, while seeking opportunities to help you achieve your financial goals.
* The CFA designation is offered by the CFA Institute. To obtain the CFA charter, candidates must pass three exams demonstrating their competence, integrity, and extensive knowledge in accounting, ethical and professional standards, economics, portfolio management, and security analysis, and must also have at least four years of qualifying work experience, among other requirements.
1 Dow Jones U.S. Total Stock Market Index
2 Russell 1000 Growth Index
3 Russell 1000 Value Index
4 MSCI USA Quality Index
5 Russell 1000 Index minus Russell 2000 Index
6 MSCI EAFE Index (Net MA Tax)
7 MSCI EM Index (Net MA Tax), respectively
8 MSCI EAFE Quality Index
9 MSCI EAFE Growth Index (Net MA Tax)
10 Bloomberg Barclays U.S. Aggregate Bond Index
11Tax-smart (i.e., tax-sensitive) investment management techniques, including tax-loss harvesting, are applied in managing certain taxable accounts on a limited basis, at the discretion of the portfolio manager, primarily with respect to determining when assets in a client's account should be bought or sold. Assets contributed may be sold for a taxable gain or loss at any time. There are no guarantees as to the effectiveness of the tax-smart investment techniques applied in serving to reduce or minimize a client's overall tax liabilities, or as to the tax results that may be generated by a given transaction.
Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.
Past performance is no guarantee of future results.
Diversification and asset allocation do not ensure a profit or guarantee against loss.
Indexes are unmanaged. It is not possible to invest directly in an index.
The views expressed in the foregoing commentary were prepared by Strategic Advisers LLC based upon information obtained from sources believed to be reliable but not guaranteed. This commentary is for informational purposes only and is not intended to constitute a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The information and opinions presented are current only as of the date of writing without regard to the date on which you may access this information. All opinions and estimates are subject to change at any time without notice.
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.
Foreign investments involve greater risks than U.S. investments, including political and economic risks and the risk of currency fluctuations, all of which may be magnified in emerging markets.
Lower-quality debt securities generally offer higher yields, but they also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer.
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. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible.
Investments in smaller companies may involve greater risk than those in larger, more well‐known companies.
Because of their narrow focus, sector funds tend to be more volatile than funds that diversify across many sectors and companies.
Securities indexes are unmanaged and are not subject to fees and expenses typically associated with managed accounts or investment funds. Benchmark returns assume the reinvestment of dividends and interest income. Investments cannot be made directly in a broad‐based securities index.
Fidelity® Wealth Services provides non‐discretionary financial planning and discretionary investment management through one or more Portfolio Advisory
Services accounts for a fee. Advisory services offered by Fidelity Personal and Workplace Advisors LLC (FPWA), a registered investment adviser, and Fidelity Personal
Trust Company, FSB (FPTC), a federal savings bank. Nondeposit investment products and trust services offered through FPTC and its affiliates are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government agency, are not obligations of any bank, and are subject to risk, including possible
loss of principal. Discretionary portfolio management services provided by Strategic Advisers LLC (Strategic Advisers), a registered investment adviser. Brokerage
services provided by Fidelity Brokerage Services LLC (FBS), and custodial and related services provided by National Financial Services LLC (NFS), each a member NYSE
and SIPC. FPWA, Strategic Advisers, FPTC, FBS, and NFS are Fidelity Investments companies.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917
© 2020 FMR LLC. All rights reserved.
First Quarter 2020: Account Summary
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