Quarterly Investment Review

A message from the Investment Management Team of Strategic Advisers LLC

By Brian Enyeart, CFA®,* President, Strategic Advisers LLC- First Quarter 2023 Review

First Quarter 2023: Key Takeaways


The U.S. economy continued to grow slowly in the face of headlines reporting bank closures, inflation, and recession risk. Historically, this type of growth has been common during late-cycle expansions.


The U.S. economy continued to grow slowly in the face of headlines reporting bank closures, inflation, and recession risk. Historically, this type of growth has been common during late-cycle expansions.


The year kicked off with a strong quarter for stocks and bonds.1


Stocks have generally produced positive results during late cycle. However, periods of market volatility have also been common.

Market Backdrop

Volatility persisted and the U.S. economy remained in late-cycle expansion

  • Several smaller U.S. banks experienced stress. Nevertheless, the job market remained strong, wages rose, and consumers continued to spend.
  • The U.S. Federal Reserve (Fed) increased interest rates again to fight inflation. However, the Fed may not raise rates much higher than current levels.

In the first quarter, the U.S. economy grew. Corporate profits moved lower, but still exceeded investor expectations. Unemployment remained low, despite high-profile layoffs in the technology sector and other areas of the economy. Consumer spending ticked higher.2 A handful of small banks closed, along with Silicon Valley Bank. However, their problems don’t appear indicative of a systemic issue. Inflation remained high but continued its downward trend.

A mild winter helped Europe escape an energy crunch. China re-opened from COVID, but it has not yet resulted in a booming Chinese economy. This may be one reason emerging-market stocks lagged international developed stocks last quarter.3

Bonds experienced gains for the second quarter in a row even as the Fed raised rates. Bonds have returned over 7% from their October 2022 low.4 This shows rate hikes don’t always lead to bond losses.


Sought to further reduce risk

  • We lowered exposure to U.S. stocks and added to investment-grade bonds.
  • We increased exposure to international stocks. These investments are inexpensive5 relative to U.S. stocks. They may be positioned to provide favorable returns.


We increased investment-grade bond exposure and trimmed exposure to high-yield bonds. Historically, investment-grade bonds have helped to provide stability during market volatility. Meanwhile, high-yield bonds tend to be more sensitive to market volatility.

We believe intermediate-term treasuries may benefit from the current market environment. Therefore, we added to intermediate-term treasuries and reduced exposure to corporate bonds, mortgage-backed investments (MBS), and asset-backed bonds.

International Stocks 

We adjusted our allocations to favor core managers. Core managers invest in both growth stocks and value stocks without favoring one over the other. Instead, they may invest in growth companies while still looking for reasonably priced investments. We believe these managers may perform better as the business cycle matures.

Emerging-market economies may benefit from China’s economic re-opening. As a result, we had more exposure to emerging markets than international developed markets. Within emerging markets, we had greater exposure to China, and less exposure to the Middle East and South Korea.

Within international developed markets, we had more exposure to Canada and less exposure to Europe, Australia, and Switzerland. Canadian stocks may benefit from rising energy and commodity prices.

U.S. Stocks

Based on historical return patterns during late-cycle expansions and market fundamentals,6 our allocations favor:

  • Value stocks
  • Core research-driven managers, with a proven track record of performing above their benchmarks

We reduced our exposure to small and mid-sized companies. These companies historically tend to experience more volatility during late-cycle expansions. Nevertheless, we maintain slightly higher exposure to these investments than the broader market.7 Smaller companies have historically performed better than large ones over the long run.8 Additionally, we increased allocations to managers who invest in quality9 companies. These investments have historically outperformed the broader market in late-cycle expansions.


Stocks and bonds were up for the quarter

  • Stocks and bonds were up for the quarter10
  • Investment-grade bonds brought in another positive quarter.
  • High-yield bonds experienced volatility but finished the quarter positive.
Market Performance: Quarter and One-Year 2023 Q1

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 3/31/2023.


Managing risk even as markets rise

  • Although markets have performed well, economic growth has slowed.
  • We have taken a measured approach to managing risk by reducing exposure to stocks.
  • We seek to strike a balance so that clients may benefit from market upswings without experiencing the brunt of market volatility.

Positive returns12 may surprise some investors who have read news headlines about potential recession, bank pressures, and political turbulence. But historically, stocks and bonds have generally experienced gains during late-cycle expansions.

U.S. economic growth has remained positive. Nevertheless, we have seen signs that growth may be slowing down. It appears that banks have started to lend less money. This trend was exacerbated by recent stress on some smaller banks. Furthermore, earnings growth within the stock market13 has slowed.

Should we see clearer signs of a recession emerging, we will aim to further reduce risk levels. However, it’s also important to proactively position client accounts to help benefit from an eventual market recovery. For example, in 2020, the recession began in February and ended in April, but markets started rallying in March. Focusing too much on managing risk would have likely led to weaker returns during that time.

We will continue to monitor the U.S. economy and developments in Washington around the debt ceiling and other relevant issues. We’ll aim to use our extensive research capabilities and expertise to help manage risk and seek out opportunities for long-term growth within client accounts.

1. Bonds are measured by the Bloomberg U.S. Aggregate Bond Index, Non-U.S. stocks are measured by the MSCI All Country World (ACWI) ex. U.S. Index (Net MA Tax), and U.S. stocks are measured by the Dow Jones U.S. Total Stock Market Index.

2. Source: U.S. Bureau of Economic Analysis, as of 3/31/2023

3. Emerging market stocks are measured by the MSCI Emerging Markets Index (Net MA Tax) and international developed stocks are measured by the MSCI EAFE Index (Net MA Tax).

4. Bloomberg U.S. Aggregate Bond Index returned 7.68%, 10/24/2022-3/31/2023

5. Based on trailing PE ratios for the MSCI All Country World (ACWI) ex. U.S. Index

6. Fundamentals are information that contributes to the financial or economic well-being of an investment and its subsequent financial valuation.

7. The broader market for U.S. stocks is measured by the Dow Jones U.S. Total Stock Market Index.

8. Source: Bloomberg, small and large companies are represented by the S&P 600 Index and S&P 500 Index, respectively, 1993-2023.

9. Quality companies tend to have more stable earnings and lower levels of debt than the broader market.

10. As measured by the MSCI EAFE Index (Net MA Tax), the Dow Jones U.S. Total Stock Market Index, and the MSCI Emerging Markets Index (Net MA Tax), respectively.

11. Bloomberg Municipal Bond Index as of March 31, 2023

12. For the six-month period ending 3/31/2023, U.S. Stocks returned 14.9% as measure by the Dow Jones U.S. Total Stock Market Index and bonds returned 4.9% as measured by the Bloomberg U.S. Aggregate Bond Index.

13. Source: Bloomberg, as measured by the S&P 500 Index

* 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 S&P MidCap 400® provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500®, is designed to measure the performance of 400 mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment.

- The S&P SmallCap 600® seeks to measure the small-cap segment of the U.S. equity market. The index is designed to track companies that meet specific inclusion criteria to ensure that they are liquid and financially viable.

- The S&P 500® seeks to measure the large-cap segment of the U.S. equity market. The index includes 500 leading companies and covers approximately 80% of available market capitalization.

- MSCI AWCI ex US Index: The MSCI ACWI ex USA Index captures large and mid-cap representation across 22 of 23 Developed Markets countries (excluding the US) and 24 Emerging Markets countries. The index covers approximately 85% of the global equity opportunity set outside the U.S.

- 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 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%.

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 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.investment adviser. Discretionary portfolio management services provided by Strategic Advisers LLC (Strategic Advisers), a registered investment adviser. Brokerage services provided.

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