Quarterly Investment Review

A message from the Investment Management Team of Strategic Advisers LLC

By Brian Enyeart, CFA®,* President, Strategic Advisers LLC- Second Quarter 2022 Review

Second Quarter 2022: Key Takeaways


The U.S. Federal Reserve raised interest rates to fight inflation. This led to market volatility due to uncertainty related to future economic growth.


We reduced risk within well-diversified client accounts. To help manage inflation, we increased exposure to commodities. We also added to investment grade bonds and shortterm investments. 


Global stocks and bonds fell and investment grade bonds outpaced stocks. 


The U.S. economy and corporate profits are still growing, but at a slower pace. Stocks and bonds have historically experienced modest gains through similar environments but have also encountered periods of volatility. 


Market Backdrop

U.S. economy experiencing late-cycle expansion 

  • Unemployment remained low, consumer spending was positive and corporate profits grew.
  • However, the pace of U.S. economic growth slowed, and consumer confidence sagged under high inflation.

Market volatility has been unsettling for many investors. Meanwhile, high inflation has led consumer confidence to fall. We believe the risks of a recession have risen. However, we also believe this backdrop reflects a late-cycle expansion rather than a recession. This means the economy continues to grow, but at a slower pace. For instance, the unemployment rate has remained below 4%. That is well below the average peak of 8% we typically see during recessions.1 First quarter corporate profits also rose, but at a slower pace than in 2021.2

Overseas, many economies are also in late-cycle expansions. Fewer restrictions around COVID-19 have led to recoveries in the job market, global trade, and international travel. But inflation and rising interest rates contributed to slower economic growth. Meanwhile, China’s COVID-19 shutdowns disrupted global supply chains. However, China has started to loosen some of its restrictions on economic activity. 


Lowered risk by reducing stocks and adding bonds  

  • We reduced risk by lowering allocations to stocks, real estate investments, and high-yield bonds, while adding to investment-grade bonds. 
  • We added to our commodity exposure to help manage risk from inflation. Commodity investments have historically done well when inflation runs high.


Rising interest rates led to volatility for bond investors. However, bonds offered higher yields as the quarter ended. Additionally, they appeared to have priced in upcoming interest rate hikes. Therefore, they may experience positive returns and less volatility through the rest of the year.

International Stocks 

he quarter ended with slightly lower exposure to U.S. stocks. This positioning may allow client accounts to experience less volatility in the face of economic uncertainty. Within U.S. stocks, we had a small tilt towards value stocks. Value stocks have historically performed relatively well during periods of higher inflation and rising interest rates. We maintained greater exposure to mid and small company stocks because their valuations are attractive.3

As the business cycle matured, we added exposure to high-quality stocks. These have typically experienced less volatility than the broader market4 during late-cycle expansions. 

U.S. Stocks

We reduced our exposure to international developed stocks, as we believe they may also experience further volatility. European economies grew but faced late-cycle pressures as global inflation ran high. At the same time, we maintained some exposure to commodity producing companies in Canada and Australia. These stocks may benefit from rising commodity prices, which have soared over the last year. 


Bonds outpaced U.S. and international stocks

  • Both U.S. and international stocks fell. 
  • Emerging markets outpaced international developed stocks. 
  • Investment grade bonds experienced unusually sharp volatility due to rising interest rates. But we believe bond investors may have already weathered some of the worst of it. 

Market Performance: Quarter and One-Year 2022 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 U.S. Aggregate Bond Index. All data is as of 6/30/2022. 


Late-cycle expansions have historically experienced gains, but market volatility has also been common 

  • Late-cycle expansions have historically supported positive performance for stocks, bonds, and other investments.
  • Higher interest rates may lead to cooler demand for goods and services. As a result, inflation pressures may peak and slowly start to diminish. 

Persistently high inflation has led some investors to believe that the U.S. is already in a recession. However, unemployment is low, corporate profits are rising, banks are lending money, and low inventories keep factories producing more goods. Therefore, we believe the U.S. economy is showing signs of continued but slowing growth. That’s typical of what we call a late-cycle expansion. Even so, recession risks have risen as well. This is a normal part of late-cycle expansions. These early recession concerns may tempt some investors to reduce their level of risk. Yet we believe it may be premature to further reduce risk at this time. That’s because stocks have usually risen through latecycle expansions. For example, U.S. stocks were up 31%4 in 2019, even as the pace of economic and corporate profit growth was slowing in a late-cycle expansion.

In 2022, stocks may rally if: 

  • Second quarter earnings are strong 
  • Inflation shows signs of easing 
  • Geopolitical issues improve in Ukraine or China 

We understand that many investors may feel anxious after a difficult start to the year. We will use our deep research capabilities to closely follow developments that may impact returns. As economic and market conditions evolve, we will monitor and seek to adjust your diversified mix of investments based on our decades of experience. Helping our clients reach their financials goals remains our number one priority. 

 1Source: U.S. Bureau of Labor Statistics and Bloomberg Finance, LP, recession unemployment levels since 1950

2Source: Bloomberg Finance LP, Q1 2022 S&P 500 earnings 

3As measured by forward price-to-earnings ratios  

4Dow Jones U.S. Total Stock Market Index, 1/1/2019-12/31/2019

5Source: Fidelity Asset Allocation Research Team (AART)

* 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.

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 broadbased 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 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 belowinvestment–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. 

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917 

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