Quarterly Investment Review

A message from the Investment Management Team of Strategic Advisers LLC

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

Third Quarter 2022: Key Takeaways


The U.S. Federal Reserve (the Fed) increased interest rates to fight inflation. In reaction, the outlook for economic growth dampened, leading to global market volatility.


We further reduced risk within well-diversified client accounts by lowering exposure to stocks and adding to investment grade bonds. We maintained commodities exposure to help protect against inflation.


U.S. stocks outperformed bonds and non-U.S. stocks in an environment where both stocks and bonds fell.


U.S. economic growth is positive but slowing. We are analyzing signs of recession and proactively managing risk within client accounts.


Market Backdrop

U.S. economy experiencing late-cycle expansion 

  • The U.S. economy continued to show signs of health.
  • However, the pace of U.S. economic growth appeared to be slowing.

Market volatility and rising interest rates led many investors to worry about a possible U.S. recession. Nevertheless, the U.S. economy did not appear to be contracting, which is what typically occurs during a recession. Home sales and housing prices fell during the quarter, which can be a sign of slowing economic growth. Yet unemployment was unusually low at 3.5%1. Additionally, consumer spending, which has historically driven nearly 70% of U.S. economic growth, remained positive.2 Corporate profits grew during the quarter as well.3

Outside the U.S., higher energy prices dragged on the outlook for European growth. Energy-producing countries outside of Europe, such as Canada and Brazil, may have benefited from selling oil at higher prices.

Meanwhile, China struggled with COVID-19 shutdowns and lower global demand for its goods. However, China may recover as a result of recent economic stimulus.


Lowered risk by reducing exposure to stocks and increasing exposure to bonds

  • We reduced risk by lowering allocations to stocks, real estate investments, commodities, and high-yield bonds. Meanwhile, we added to investment-grade bonds and alternative investments.
  • We maintained some exposure to commodities. Historically, commodities have done well when inflation runs high.


Interest rates rose more than expected as the Fed ramped up its efforts to fight inflation. This created additional volatility for bond investors. However, rising interest rates also led to higher bond yields. We believe these higher yields may provide opportunities for long-term bond investors to earn more income going forward. Higher yields also tend to insulate bonds from volatility. Therefore, bonds may return to their typical role as a portfolio diversifier.

International Stocks 

High energy prices in Europe led us to reduce our overall exposure to international developed stocks. Although we added some exposure to low- volatility stocks. These are typically companies with stable demand for their goods and services regardless of economic conditions. Some examples of low-volatility stocks include drug manufacturers or waste disposal services. Despite recent volatility, we kept some exposure to emerging market stocks. We believe China’s efforts to stimulate its economy may lead to the start of a recovery, which could benefit its global trade partners, including the U.S.

U.S. Stocks

We ended the quarter with slightly lower exposure to U.S. stocks than the previous quarter. We favored value stocks over growth stocks. Value stocks have typically performed well during periods of higher inflation and rising interest rates. We also maintained greater exposure to mid-sized and small company stocks due to their attractive valuations. Lastly, we emphasized exposure to high quality stocks and strategies with stable earnings growth.


U.S. stocks outpaced international stocks and bonds

  • Both U.S. and international stocks fell.
  • International developed stocks outpaced emerging market stocks.
  • Investment grade bonds fell, but high yield bonds were stable. 
Market Performance: Quarter and One-Year 2022 Q3

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 9/30/2022.


Seeking to manage risk while following developments on inflation and economic growth

  • Periods of market volatility are common during late-cycle expansions. Likewise, market rallies are also common during these periods.
  • Recession risks may rise as the Fed hikes interest rates. However, the outlook for investors may improve if inflation diminishes.

Clients may feel discouraged by the recent performance of their accounts. Rest assured that we constantly analyze developments on inflation and economic growth. We seek to use our experience and research capabilities to proactively manage risk through this challenging time. Helping our clients reach their financials goals remains our number one priority.

We do not believe the U.S. is in a recession. Should the U.S. tip into recession, we would continue to seek to manage risk and focus on long- term performance. But there are risks to being overly cautious in the face of recession concerns. As recently as 2020, we witnessed fears of a long recession quickly give way to a strong stock market recovery, as U.S. stocks rallied nearly 70% (including dividends) from the end of March 2020 through the end of that year.5 If investors had avoided stocks in 2020, they would have missed out on that recovery.

If inflation starts to slow, the Fed may wind down its plans to increase rates sooner than expected. The U.S. economy could continue to grow at a modest pace for some time, which may lead to a stock market recovery.

Overseas, stock market valuations are extremely low, both by historical standards and relative to the U.S.6 Thus, we believe many investor concerns over Europe and China are already priced into the market. The U.S. dollar has also risen to high levels relative to other currencies for the last year.7 This has hindered international stock performance for U.S. investors. Should this trend reverse, as it historically has after previous dollar rallies,8 that may bolster international stock performance for U.S.-based investors.

1.  Source: FactSet and U.S. Department of Labor, U.S. Unemployment Rate as of 9/30/2022

2.  Bureau of Economic Analysis

3.  Source: Bloomberg as of 9/30/2022

4.  Bloomberg Municipal Bond Index, as of 9/30/2022

5.  Source: Bloomberg

6.  Source: Bloomberg

7.  U.S. Dollar Index, as of 9/30/2022

8.  Source: Bloomberg

* 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. 

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