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Quarterly Investment Review

A message from the Investment Management Team of Strategic Advisers LLC

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

Fourth Quarter 2020: Key Takeaways

MARKET BACKDROP

The global economy’s early cycle recovery has continued, despite uncertainty around the COVID-19 pandemic and the U.S. political landscape.

POSITIONING

We increased exposure to stocks and high-yield bonds. Meanwhile, we reduced exposure to investment-grade bonds and short-term investments.

PERFORMANCE

Large-growth companies led the way for the year as U.S. stocks climbed higher. International stocks also experienced gains. Meanwhile, bonds delivered exceptionally strong returns.

OUTLOOK

Covid-19 vaccines could lead to an improving global economic environment in 2021.

Market Backdrop

Most major global economies closed the year in early cycle recoveries

  • Unemployment fell, consumer spending rose, and global manufacturing improved.
  • Historically, a recovering global economy has led to positive investment performance.

Although U.S. economic activity has not yet returned to previous highs, we witnessed several signs of recovery. For instance, unemployment fell from nearly 15% in the spring to below 7%Consumer spending, which accounts for nearly 70% of annual U.S. economic growth, rose significantly since April. Likewise, global manufacturing activity steadily improved since the initial shock of the pandemic in the spring.

Some investors worried that a resurgence in COVID-19 cases, and uncertainty surrounding the U.S. elections, would hinder growth. Yet most investors experienced healthy gains in 2020. As the year came to a close, the U.S. economy remained in the early recovery phase of the business cycle. Historically, early cycle recoveries have driven gains for investors. They have also preceded expansions that have often lasted for years.

Positioning

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

  • We added to positions in stocks and high-yield bonds, which may benefit from an economic recovery.
  • We reduced exposure to investment-grade bonds and short-term investments, which may lag stocks.
  • Within stock funds, we modestly rebalanced our positioning away from growth funds.

Within client portfolios, we further increased exposure to stocks. And, we reduced exposure to bonds relative to each client’s long-term target asset allocation mix. We believe that stocks, real estate investments, and high-yield bonds may benefit more from the economic recovery than investment-grade bonds and short-term investments.

U.S. Stocks

After their strong performance in 2020, some growth stocks became relatively more expensive compared to the broader market. Therefore, we modestly reduced our exposure to growth fund managers. We have increased some exposure to core fund managers. Core stocks may have more attractive valuations than growth stocks and therefore, may outpace them. We also increased exposure to funds that invest primarily in small- and mid-sized companies. They have historically outperformed larger-company stock funds during early-cycle recoveries.

International Stocks

We expanded exposure to both international developed and emerging-market stocks during the quarter. We believe stocks overseas may benefit from economic recoveries taking place around the world. In fact, financial industry analysts expect stronger earnings growth overseas than in the U.S. Moreover, international stocks are generally trading at lower valuations than U.S. markets. Therefore, these stocks may experience strong performance in 2021.

Bonds

High-yield bonds have historically experienced strong performance during economic recoveries. Therefore, we increased our exposure there and reduced exposure to investment-grade bonds. Within investment-grade bonds, we helped reduce risk by increasing exposure to intermediate-duration treasuries. They offer modest yields but may provide a buffer against stock market volatility.

Performance

Positive performance across stocks and bonds

  • Stocks outperformed bonds.
  • U.S. stocks outpaced international markets.
  • Bonds experienced strong gains for the year.

Rapid intervention by governments and central banks around the world have helped the stock market recover since April. Over the last year, large growth stocks led U.S. stock performance, while value stocks lagged. As for international stocks, emerging markets2 outperformed large developed markets.3

3-month and 12-month Market Performance as of December 31, 2020

Past performance is no guarantee of future results. It is not possible to invest directly in an index. All indexes are unmanaged. U.S. Stocks are represented by the Dow Jones U.S. Total Stock Market Index, International Developed 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), and Bonds are represented by the Bloomberg Barclays U.S. Aggregate Bond Index, as of 12/31/2020. Source: Fidelity Investments.

Outlook

The vaccine rollout may lead to global economic and earnings recoveries

  • Consumer spending may boost earnings for a wide range of businesses globally.
  • Yet risks remain, and taking a diversified, disciplined investment approach may help you reach your goals.

As vaccines come to market and gradually reach individuals around the world, we believe that the global economy may experience strong growth in 2021. Through a combination of lower spending and government cash distributions, U.S. consumers have increased their savings by nearly 1 trillion dollars since the pandemic.4 Post-pandemic, increased consumer spending may lead to strong earnings growth for many businesses.

For investors who focus on the long term, there may be opportunities to invest in businesses that can thrive in this improving environment. These new opportunities may not be the same as those investments that excelled during a stay-at-home environment.

Yet we are also mindful that risks for investors haven’t disappeared. Questions remain around the direction of policy in Washington DC. Congress continues to be closely divided and political tensions can run high. We may also see uncertainty on the pace of the vaccine rollout, a slower jobs recovery, or lower consumer spending than expected.

Therefore, we’ll continue to conduct deep research into investment opportunities, including closely following policy changes that could impact your account. We’re also maintaining a diverse mix of stock and bond investments to help provide a smoother investment experience through bouts of market volatility. We believe our disciplined process may help you reach 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. U.S. Bureau of Labor Statistics, seasonally adjusted as of 11/30/2020.

2. MSCI Emerging Markets Index (Net MA Tax), as of 12/31/2020.

3. MSCI EAFE Index (Net MA Tax), as of 12/31/2020.

4. Bureau of Economic Analysis, Haver Analytics, and Fidelity Investments (AART), as of 11/30/2020.

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.

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.

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

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