Quarterly Investment Review

A message from the Investment Management Team of Strategic Advisers LLC

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

Fourth Quarter 2019: Market Summary


U.S. stocks, international stocks, and bonds all rose during the year, supported by U.S. Federal Reserve rate cuts and receding concerns about a global economic slowdown.


U.S. consumer confidence and spending remained resilient, supported by a strong jobs market and rising wages. Meanwhile, late-cycle tensions led to slow corporate profit growth.


Improvement in the outlook for the world’s second biggest economy could help boost many export-oriented economies, such as Germany, Japan, and South Korea.

Good year for growth and quality stocks, while value stocks picked up in the final months

Over the last year, U.S. stocks rose 30.9%.1 A reversal in U.S. Federal Reserve policy and continued economic growth helped drive markets higher.

  • Growth stocks continued their multi-year outperformance by gaining 36.4%.2
  • Value stocks outpaced growth stocks in the final months of 2019 and finished the year up 26.5%.3 Value stocks tend to do well when economic growth is on firmer footing.
  • Quality stocks, which are companies with low debt and stable earnings, returned an impressive 39.1%.4
  • Low volatility stocks lagged the broader market, but were still up 27.1%.5

Periods of market volatility in May and August of last year provided opportunities for us to rebalance client accounts. Our disciplined rebalancing process helped to:

  • Keep the investments in your account aligned to your financial goals.
  • Find opportunities to buy stocks at lower prices after some market declines. These opportunities led to investment gains as stocks recovered.

We are avoiding defensive stocks while increasing quality stocks, which are cheaper and higher growth

Our research has shown that certain types of stocks perform well depending on the phase of the business cycle. For example, we believe companies with high quality characteristics may perform well during the late phase of the business cycle. Therefore, we increased allocations to high quality stocks over the last few years.

At various times over the last two years, defensive stocks, such as utilities, have performed well as investors sought safer investments amid fears of recession. However, we have generally avoided defensive stocks because we believe that these areas of the market are expensive and slow growing. In our view, quality stocks are more reasonably priced than defensive stocks, and have higher long-term growth rates.

International growth stocks made a strong showing for the year, and China mattered

After a modest start, international stock returns improved in the final months of 2019. For the year, developed markets outperformed emerging markets. Overall, our international stock funds have strongly outperformed both developed and emerging market indexes.

In 2019, client accounts particularly benefited from our strong allocations toward international quality growth stocks. That’s because in an uncertain economic environment, earnings growth can become harder to find. Investors then seek out companies with low levels of debt, stable earnings, and a positive growth outlook.

Within emerging markets, the size of an investor’s exposure to China mattered in 2019. China makes up a significant percentage of emerging market stocks. Over the last few years, we’ve emphasized emerging market managers with a dedicated China research focus. This focus helped client accounts because local China stocks have outperformed most other areas of the Chinese market. This is particularly true for technology and consumer stocks.

Strong year for treasuries and corporate bonds as rates fell and the U.S. economy remained resilient

Overall, bonds experienced strong performance with a return of 8.7%6 for the year. As interest rates fell, and fears of a more significant economic slowdown receded, both U.S. Treasuries and corporate bonds performed well. Strong corporate bond performance may indicate that businesses are healthy and corporate earnings are stable, leaving investors less concerned about possible bond defaults.

Historically, stock market volatility can rise during the late phase of the business cycle. As a result, we’ve lowered risk levels in most client accounts by reducing exposure to stocks, high-yield bonds, and commodities. Instead, we have increased exposure to investment-grade bonds. Additionally, within our small allocations to high yield, we have sought to own more defensive-oriented high yield bonds. These positions have benefitted client accounts, as our investments in both investment grade bonds and high yield bonds outperformed their broader indexes for the year.

Our outlook: Keeping an eye on corporate profits, wages, China, and more

As 2020 progresses, we will continue to monitor employment, wages, and other factors that may influence consumer-spending patterns. We will also look for changes in the pace of economic growth and corporate profits. Our research tracks economic indicators and confirms these indicators using company-specific and real world signals.

Outside of the U.S., some key areas that we are following within China include:

  • Stabilizing industrial activity
  • Subdued credit growth
  • Remaining trade tensions with the U.S.

Due to the size of the Chinese economy and its importance to other countries, developments in these areas may be critical to the global economy in 2020. 

We remain dedicated to watching for shifts in the economy that will help inform the prudent investment decisions that we make on your behalf. 

* 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 three 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 MSCI USA Minimum Volatility Index
6 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.

Diversification cannot 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, Inc., 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.

Alternative investment strategies can invest in securities that may have a leveraging effect (such as derivatives and forward-settling securities), which may increase market exposure, magnify investment risks, and cause losses to be realized more quickly. These strategies may invest in commodity-linked investments, which may be more volatile and less liquid than the underlying instruments or measures. The commodities industry can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions. Short positions pose a risk because they lose value as a security’s price increases; therefore, the loss on a short sale is theoretically unlimited.

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

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

The MSCI USA Quality Index is based on the MSCI USA Index, its parent index, which includes large and mid cap stocks in the U.S. equity market. The index aims to capture the performance of quality growth stocks by identifying stocks with high quality scores based on three main fundamental variables: high return on equity (ROE), stable year-over-year earnings growth and low financial leverage.

The MSCI USA Minimum Volatility Index aims to reflect the performance characteristics of a minimum variance strategy applied to the large and mid cap USA equity universe. The index is calculated by optimizing the MSCI USA Index, its parent index, in USD for the lowest absolute risk (within a given set of constraints). Historically, the index has shown lower beta and volatility characteristics relative to the MSCI USA Index.

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.

Other disclosures:

Stock values fluctuate in response to the activities of individual companies and to general market and economic conditions.

  • 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 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 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.


Fourth Quarter 2019: Account Summary

U.S. Stocks:

  • Increased allocations to high quality U.S. stocks, which tend to perform well in late cycle.

International Stocks:

  • Exposure to outperforming international quality growth stocks helped performance.
  • Within emerging markets, emphasized funds with dedicated China research, which helped client accounts as local China stocks outperformed.


  • Increased exposure to investment grade bonds and defensive-oriented high yield bonds, to help manage risk levels.

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