Quarterly Investment Review

A message from the Investment Management Team of Strategic Advisers LLC

By Brian Enyeart, CFA®,* President, Strategic Advisers LLC- Second Quarter 2021

Second Quarter 2021: Key Takeaways


The U.S. economy has entered mid-cycle expansion. This is a phase of the business cycle that has historically been positive for stocks. 


We increased exposure to international developed market stocks, commodities, and investment-grade bonds. Meanwhile, we reduced exposure to high-yield bonds.


U.S and international stocks experienced healthy gains. Investment-grade bonds also had positive performance.


Our outlook for global stocks remains positive, though we are closely following developments on inflation and central bank policies.

Market Backdrop

U.S. economy entered mid-cycle expansion

  • Rising vaccination rates have supported a broader economic recovery and strong corporate profit growth.
  • Recently, the backdrop for stocks has been positive. However, going forward, stock market performance may be more modest than it has been over the last year.

A large proportion of U.S. residents have received COVID-19 vaccines. As a result, consumer spending remained robust and shifted toward services such as travel and dining out. This led to strong earnings results across a wide range of businesses.

The United States is now more than a year removed from the start of the COVID-19 pandemic. While we continue to experience an economic recovery, we believe the pace of growth is likely to moderate from recent extraordinary levels. In this environment, investors may experience more market volatility than they have so far this year.


Favoring stocks over bonds and short-term investments

  • Added to positions in commodities. These investments typically benefit from economic recoveries and potentially higher inflation.
  • Reduced exposure to high-yield bonds in favor of investment-grade bonds. This modest reduction in risk could help investors experience less volatility.


With interest rates stabilizing, we strategically positioned bond allocations as the U.S economy entered mid-cycle expansion.

  • We slightly reduced exposure to high-yield bonds. They tend to be more volatile during periods of stock market volatility.
  • We added exposure to investment-grade bonds. We believe they can provide some protection during periods of stock market volatility.

We remain diversified across different types of investment-grade bonds. These include U.S. Treasuries, Treasury inflation-protected bonds (TIPS), high-quality corporate bonds, and asset-backed bonds. Diversification could potentially result in competitive yields, and less exposure to risk from inflation or rising interest rates.

U.S. Stocks

Over the last few months, we’ve reduced our exposure to deep value managers. These managers typically invest in companies that seek to recover from stark challenges. One example is travel-related businesses after the pandemic. With the early-cycle recovery now behind us, we increased our exposure to more traditional value managers. They tend to perform better than deep value managers in a mid-cycle expansion.

Within growth stocks, we continued to have less exposure to aggressive growth managers. Instead, we have found more compelling opportunities within some core U.S. managers. We favored those with strong fundamental research teams and solid track records during mid-cycle expansions.

International Stocks

We modestly increased our exposure to international developed-market stocks. Many of these markets, such as Europe and Canada, remain behind the U.S. in their economic recoveries. However, they have improved their vaccination rates and could catch up to the U.S. in the coming months. In fact, most financial industry analysts believe that corporate earnings growth over the next 12 months may be stronger overseas than for the U.S.


Global stock and bond markets produced positive performance

  • Both U.S. and international stocks outperformed bonds.
  • Investment-grade bonds experienced gains as interest rates stabilized.


Market Performance: Quarter and One-Year 2021 Q2

Past performance is no guarantee of future results. U.S. stocks are represented by the Dow Jones U.S. Total Stock Market Index, International Developed Market Stocks are represented by the MSCI EAFE Index (Net MA Tax), Emerging Market Stocks are represented by the MSCI Emerging Markets Index (Net MA Tax), High Yield Bonds are represented by the ICE BAML High Yield Constrained Index, and Investment Grade Bonds are represented by the Bloomberg Barclays U.S. Aggregate Bond Index. All data is as of 6/30/2021.


Positive outlook for stocks

  • Closely following developments on inflation and central bank policies.
  • Over the last few months, inflation has been higher than what most investors have experienced over the last 25 years. However, we believe this inflation is likely to fade over time.

Strong consumer demand, supply chain disruptions, and labor shortages have driven prices higher across a range of goods and services. However, we believe all those areas are likely to trend towards their more typical levels over the coming quarters. As that occurs, inflation is likely to move closer to the Federal Reserve’s long-term target of 2%. That’s a level of inflation that can reflect solid economic growth. Furthermore, that level shouldn’t place undue pressure on consumers or businesses from rising prices.

Part of what is supporting our view is that the Federal Reserve has started to discuss several steps it may take to help reduce inflationary pressures. The Fed is still some distance away from increasing short-term interest rates. However, it may be edging closer to slowing its bond purchasing program. This could help dampen inflation expectations and drive some intermediate interest rates gradually higher.

While those steps could help calm inflation, they could also increase market volatility. Therefore, we believe a well-diversified portfolio of stocks, bonds and other investments could help you experience a smoother ride and help your investments grow over the long term.

* 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

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.

Growth stocks can perform differently from the market as a whole and other types of stocks, and can be more volatile than other types of stocks.

Value stocks can perform differently from other types of stocks, and can continue to be undervalued by the market for long periods of time.

The commodities industry can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions.

Index information:

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.

- The Dow Jones U.S. Total Stock Market Index is a float-adjusted, market capitalization–weighted index of all equity securities of U.S.-headquartered companies with readily available price data.

- The MSCI EAFE Index (Net MA Tax) is an unmanaged, market capitalization–weighted index of equity securities of companies domiciled in various countries. The index is designed to represent performance of developed stock markets outside the United States and Canada, and excludes certain market segments unavailable to U.S.-based investors. The index returns for periods after 1/1/1997 are adjusted for tax-withholding rates applicable to U.S.-based mutual funds organized as Massachusetts business trusts.

- The MSCI EM Index (Net MA Tax) captures large and mid-cap representation across 26 Emerging Markets (EM) countries. Emerging market countries include: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. With 1,401 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. The index returns for periods after 1/1/1997 are adjusted for tax-withholding rates applicable to U.S.-based mutual funds organized as Massachusetts business trusts.

- Bloomberg Barclays U.S. Aggregate Bond Index is a market value–weighted index of investment-grade fixed rate debt issues, including government, corporate, asset–backed, & mortgage–backed securities, with maturities of one year or more.

- The ICE BofAML U.S. High Yield Constrained Index is a modified market capitalization-weighted index of U.S. dollar-denominated below–investment–grade corporate debt publicly issued in the U.S. domestic market. Qualifying securities must have a below–investment–grade rating (based on an average of Moody's, S&P, and Fitch) and an investment–grade–rated country of risk. In addition, qualifying securities must have at least one year remaining to final maturity, a fixed coupon schedule, and at least $100 million in outstanding face value. Defaulted securities are excluded. The index contains all securities of the ICE BofAML U.S. High Yield Index but caps issuer exposure at 2%.

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. 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, FBS, and NFS are Fidelity Investments companies.

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