Quarterly Investment Review

Quarterly Investment Review

A message from the Investment Management Team of Strategic Advisers LLC

By Brian Enyeart, CFA®,* President, Strategic Advisers LLC- Third Quarter 2020

Third Quarter 2020: Key Takeaways


We believe the U.S. economy has moved past the recent recession and into the early recovery phase of the business cycle.


We have increased exposure to stocks. They have potential for strong performance as the U.S. economy slowly recovers.


Despite some market volatility in September, the quarter witnessed strong performance from global stocks, especially in emerging markets.


We are prepared for uncertainty related to the U.S. election and COVID-19, which may lead to periods of market volatility.

Market Backdrop

U.S. economy in early-cycle recovery despite challenges

  • Signs of improvement in unemployment rates, manufacturing activity, and consumer spending point to a likely recovery underway.
  • Economic recovery could lead to strong performance for many investments

In the spring of this year, the U.S. economy slowed significantly due to the COVID-19 pandemic. While economic activity has yet to return to previous levels and unemployment remains high, we believe the U.S. economy has emerged from a recession. More than 10 million jobs have been created in the U.S. since the end of March, and manufacturing activity has been improving for several months. Additionally, consumer spending has been growing since April.

We believe we are now in the early-cycle recovery phase of the business cycle. This phase has historically led to strong performance of stocks, bonds, and other investments. That’s because early-cycle recoveries have historically preceded durable economic expansions, which have usually lasted for several years.


Repositioned client accounts to potentially take advantage of early-cycle recovery

  • Increased allocations to stocks, real estate investments, and high-yield bonds, while reducing exposure to investment-grade bonds.
  • Rebalanced stock allocations away from growth funds and toward core and value-oriented funds.

Within client portfolios, we now generally have more exposure to stocks and less exposure to bonds relative to each client’s long-term target asset allocation mix. This is the reverse of our positioning near the start of the recession. We believe an early-cycle expansion may lead to strong performance, especially for stocks and real estate investments.

U.S. Stocks

Within U.S. stocks, we continue to have exposure to growth and quality fund managers. However, we have also rebalanced into value-oriented funds. The valuations for these kinds of investments are at extremely attractive levels relative to growth stocks. We have also increased our exposure to core stocks and smaller-company stocks. Both core and smaller-company stocks have so far lagged the performance of large growth stocks. However, they have historically performed well during early-cycle recoveries.

International Stocks

We increased our exposure to both international developed and emerging-market stocks. Most economies around the world are recovering from downturns earlier in the year prompted by the COVID-19 outbreak. Similar to our positioning in U.S. stocks, we continue to favor exposure to quality growth managers. They may benefit from the economic recovery and potentially experience less volatility than the broader market during periods of market uncertainty. We have added exposure to value stocks. They currently have extremely attractive valuations relative to growth stocks and the broader market. We also increased exposure to small-company stocks. They have historically performed well during early-cycle recoveries.


We have increased our allocations to high-yield bonds. They have historically performed well during early-cycle recoveries. Meanwhile, we have reduced our exposure to investment-grade bonds. Within short-term investments, we have allocated away from short-duration bond exposure toward money market funds. We believe money market funds may be more stable and help provide greater flexibility in the face of market volatility. This can help manage risk in client accounts.


Positive performance across stocks and bonds

  • Stocks outperformed bonds.
  • Emerging-market stocks outperformed U.S. and developed-market stocks.

Both U.S. and international stocks outpaced bonds, with emerging-market stocks leading the way. Stocks benefited from improving outlooks for the global economy and corporate earnings. While bond returns were modest, they helped provide stability during September’s market volatility.

Within U.S. stocks, growth stocks continued to outpace core and value stocks. And, large companies outpaced small and mid-sized companies. Real estate investments also lagged the broader stock market.


U.S. economic recovery expected to continue with periods of volatility

  • Low interest rates may support U.S. economic recovery.
  • Uncertainty regarding the U.S. election and COVID-19 could lead to periods of volatility.

We are hopeful that the economic recovery the U.S. has started to experience will carry on from here. Support from the U.S. Federal Reserve, in the form of low interest rates for several years should help, along with efforts to gradually re-open the U.S. economy.

At the same time, we are laser-focused on tracking and analyzing several risks for investors. The path of the COVID-19 pandemic remains uncertain. More cases are possible as winter approaches, although drug trials on vaccines and treatments are showing signs of progress in fighting the virus. Election season could also lead to uncertainty, as results may take longer than normal to tabulate. Additionally, lower federal government support for unemployed workers and businesses could weigh on the economic recovery. We are closely monitoring all these situations. We stand ready to rebalance and re-allocate client accounts if market volatility rises.

* 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.

1U.S. Stocks are represented by the Dow Jones U.S. Total Stock Market Index.

2. International Developed Stocks are represented by the MSCI EAFE Index (Net MA Tax).

3Emerging Market Stocks are represented by the MSCI Emerging Market Index (Net MA Tax).

4Bonds are represented by the Bloomberg Barclays U.S. Aggregate Bond Index.

​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.

You could lose money by investing in a money market fund. An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Before investing, always read a money market fund’s prospectus for policies specific to that fund.

Current and future portfolio holdings are subject to risk.

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.

Changes in real estate values or economic conditions can have a positive or negative effect on issuers in the real estate industry.

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.

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 Bloomberg Barclays Municipal Bond Index covers the USD-denominated long-term tax exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, Insured bonds, and prerefunded bonds.

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.

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