Quarterly Investment Review

A message from the Investment Management Team of Strategic Advisers LLC

By Brian Enyeart, CFA^®,* President, Strategic Advisers LLC

First Quarter 2024: Key Takeaways

MARKET BACKDROP

The U.S. economy continued to grow, and the global economy stabilized, supporting positive performance in stock markets around the world.¹

POSITIONING

We increased exposure to stocks, but generally kept stock and bond allocations close to target allocations. 

PERFORMANCE

Strong performance in the communication services and technology sectors drove stocks higher for the quarter.² Meanwhile, higher interest rates led to declines for bonds.³ 

OUTLOOK

Continued growth in the U.S. and international economies allowed for a stronger outlook for corporate profit growth. 

Market Backdrop

U.S. and many international economies showed signs of resilience.

• A stronger economic outlook raised earnings expectations, which likely helped contribute to positive stock returns for the quarter. 
• The U.S. Federal Reserve (Fed) indicated it will likely hold off on rate cuts until it sees further declines in inflation. 

U.S. stocks benefited from improved consumer confidence. This confidence may lead to continued spending on goods and services. This spending could help drive profit growth for U.S. companies. The Fed kept interest rates unchanged as it continued to battle inflation. Inflation has come down significantly from its peak of 9%, hovering just above 3% since last fall.⁴

International stocks also rose for the quarter. Economic activity and improving earnings outlooks supported international stock returns.⁵ Japan was the top-performing region within international developed stocks.⁶ Corporate governance changes in Japan have led to renewed focus on profit growth. Meanwhile, Hong Kong’s poor performance was likely due to sluggish economic growth in China.⁷.

Taiwan and India led the way for emerging markets.⁸ Both countries have benefited from improving economic backdrops. Economic challenges, including a struggling real estate sector, resulted in weak stock returns in China.⁹ 

Meanwhile, rising interest rates created a difficult environment for bond returns. Interest rates rose because the market lowered its expectations for Fed rate cuts. High yield bonds, bank loans, and emerging market bonds experienced gains. These gains helped offset some negative returns from other bonds.¹⁰

Positioning 

We increased exposure to U.S. stocks as the U.S. economy remained resilient.

• The U.S. economy has been in late-cycle expansion. Periods of market volatility have historically been normal during this phase of the business cycle. As a result, we have positioned portfolios close to target allocations across asset classes to help manage risk.
• Within asset classes, we have tended to favor research-driven managers, rather than particular investment styles.

U.S. Stocks

We had a modest preference for U.S. stocks. Even though we have not significantly favored particular investment styles, we had a few preferences within U.S. stocks:

• We increased exposure to low volatility stocks. These investments have historically experienced less turbulence than the broader market.¹¹
• We maintained more exposure to value stocks vs. growth stocks because value stocks had more attractive valuations.¹²
• We increased exposure to small- and mid-sized companies since these stocks had more attractive valuations compared to large companies.¹³

International Stocks 

We believe the global economy has been showing signs of stability. As a result, we increased exposure to international developed and emerging market stocks. We made a small increase to quality stocks.¹⁴ These stocks have historically done well during late-cycle expansions. 

We had a few preferences based on individual company opportunities, market characteristics, and economic outlooks:

• Within international developed markets, we had more exposure to North America and small companies, and less exposure to the Eurozone, Australia, and very large companies.
• Within emerging markets, we had more exposure to low volatility stocks and China. Some underlying managers believe certain China-based businesses have shown promise, despite the country’s slow economy. We had less exposure to very large companies and other emerging market countries in Asia. 
  

Bonds

We believe uncertainty surrounding inflation and economic growth may lead to fluctuations in interest rates and bond prices. As a result, we decreased exposure to investment-grade bonds, while maintaining some exposure to high yield bonds, bank loans, and emerging market bonds.

Performance

Communication services and technology stocks drove stocks higher for the quarter across the globe.¹⁵ Meanwhile, investment-grade bonds struggled as interest rates rose.¹⁶

• Emerging markets were still positive despite some challenges from China.
• High-yield bonds outperformed investment-grade bonds. 
   

Past performance is no guarantee of future results. Indexes are unmanaged. It is not possible to invest directly in an index. US stocks are represented by the Dow Jones US 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 U.S. Aggregate Bond Index. All data is as of 3/31/2024.

Outlook

The outlook for corporate profit growth has been strong. We believe the risk of an imminent recession was low as economies across the globe continued to grow.

• The job market continues to show signs of strength, wages have been rising, and consumer spending has remained positive.
• Bouts of volatility may occur as the U.S. remains in late-cycle expansion.

In addition to a strong job market, rising wages, and positive consumer spending, global manufacturing activity has shown improvement. These factors have the potential to support earnings growth and ongoing positive stock returns.

We are closely monitoring a few key risks that could change our outlook. Inflation has been more stubborn than markets had anticipated at the end of last year. This may lead to an extended period of elevated interest rates, resulting in slow economic growth. Political news headlines may also contribute to periods of volatility in the lead up to the election this year. However, stocks have historically experienced healthy gains during election years.

We believe our current positioning will likely benefit our clients if markets continue to rise. Furthermore, we believe our positioning may help provide stability if markets experience turbulence from late-cycle volatility. If the economy shows signs of stalling, we are prepared to proactively manage for further risk. 

1. MSCI All Country World (ACWI) Index (Net MA Tax), as of 3/31/2024.

2. Based on the GICS sector breakdown of the MSCI All Country World (ACWI) Index, as of 3/31/2024. 

3. Bloomberg U.S. Aggregate Bond Index, as of 3/31/2024.

4. Bureau of Labor Statistics, Consumer Price Index (CPI) seasonally-adjusted 12-month percentage change, released 3/12/2024.

5. MSCI All Country World (ACWI) Index (Net MA Tax), as of 3/31/2024. 

6. Based on a country-level breakdown of the MSCI EAFE Index, as of 3/31/2024.

7. Based on a country-level breakdown of the MSCI EAFE Index, as of 3/31/2024.

8. Based on a country-level breakdown of the MSCI Emerging Markets Index, as of 3/31/2024.

9. Based on a country-level breakdown of the MSCI Emerging Markets Index, as of 3/31/2024. 

10. ICE BofA U.S. High Yield Constrained Index, Morningstar LSTA U.S. Leveraged Loan 100 Index, and Bloomberg Emerging Markets Hard Currency Aggregate Index, respectively, as of 3/31/2024.  

11. FactSet, based on annualized standard deviation of returns for the S&P 500 Low Volatility Index versus the S&P 500Index, as of 3/31/2024.  

12. FactSet, based on forward price-to-earnings (PE) ratios for the Russell 1000 Value Index and Russell 1000 Growth Index, as of 3/31/2024. A price to earnings (PE) ratio compares the price of a company’s stock to its earnings. It is commonly used to measure a company’s value. 

13. FactSet, based on forward price-to-earnings (PE) ratios for the S&P Small Cap 600 Index, S&P Mid Cap 400 Index, and S&P 500 Index, respectively, as of 3/31/2024.

14. Quality stocks tend to have stable earnings and low levels of debt relative to other stocks. 

15. Based on the GICS sector breakdown of the MSCI All Country World (ACWI) Index, as of 3/31/2024.

16. Bloomberg U.S. Aggregate Bond Index, as of 3/31/2024.

* 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. CFA^® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

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.

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.

- MSCI Emerging Markets Index (Net MA Tax) is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors in emerging markets. Index returns are adjusted for tax withholding rates applicable to U.S. based mutual funds organized as Massachusetts business trusts (NR).

- Bloomberg 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 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.

- 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%.

- MSCI All Country World (ACWI) Index (Net MA Tax) is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed and emerging markets. Index returns are adjusted for tax withholding rates applicable to U.S. based mutual funds organized as Massachusetts business trusts (NR).

- Morningstar LSTA US Leveraged Loan 100 Index is designed to measure the performance of the 100 largest facilities in the US leveraged loan market. Underpinned by PitchBook | LCD data, the index brings transparency to the performance, activity, and key characteristics of the most tradeable loans in the market.

- Bloomberg Emerging Markets Aggregate USD Bond Index is a market value-weighted index of dollardenominated fixed- and floating-rate emerging market debt securities that are below investment grade. The index is designed to measure the performance of emerging market debt securities in the Americas, Europe, Asia, Middle East, and Africa.

- Russell 1000 Value Index is a market capitalization–weighted index designed to measure the performance of the large-cap value segment of the US equity market. It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates.

- Russell 1000 Growth Index is a market capitalization–weighted index designed to measure the performance of the large-cap growth segment of the US equity market. It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates.

- S&P Small Cap 600 Index The S&P SmallCap 600 Index is designed to measure the performance of the 600 small-sized companies in the U.S., reflecting this market segment's distinctive risk and return characteristics. Measuring a segment of the market that is typically known for less liquidity and potentially less financial stability than large caps, the index was constructed to be an efficient benchmark composed of small-cap companies that meet investability and financial viability criteria.

- S&P MidCap 400 Index is a market capitalization–weighted index of 400 mid cap stocks of US companies chosen for market size, liquidity, and industry group representation.

- S&P 500 Index is a market capitalization–weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent US equity performance.

- MSCI Emerging Markets Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors in emerging markets.

- Bloomberg Emerging Markets Hard Currency Aggregate Index measures the performance of USD, EUR, and GBP-denominated debt from sovereign, quasi-sovereign, and corporate emerging market issuers. Country eligibility and classification as emerging markets is rules-based and reviewed annually using World Bank income group and International Monetary Fund (IMF) country classifications.

- S&P 500 Low Volatility Index measures the performance of the 100 least volatile stocks in the S&P 500. It is volatility-driven.

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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