Quarterly Investment Review

A message from the Investment Management Team of Strategic Advisers LLC

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

Fourth Quarter 2023: Key Takeaways

MARKET BACKDROP

Stocks and bonds delivered healthy gains for both the quarter and the year.1 Investors appeared less concerned about inflation or the risks of a deep recession.

POSITIONING

Over the course of the year, we sought to reduce risk within well-diversified client accounts by moving allocations closer to benchmarks.

PERFORMANCE

Both stocks and bonds benefited from easing inflation. Growth and technology stocks led U.S. stock performance in 2023.2

OUTLOOK

We do not believe a recession is imminent. The decline in inflation has been welcome and consumer sentiment finished the year on an upward trend.

Market Backdrop

Falling inflation, resilient consumers, and stabilizing corporate profits supported economic growth. 

  • Global economies felt a boost from easing inflation and strong job markets, as well as healthy global trade and tourism.
  • The U.S. Federal Reserve (Fed) signaled it’s likely finished raising rates. It may even cut rates as soon as early this year should inflation continue to ease.

U.S. stocks were up more than 25%3 in 2023 led by growth4 and technology stocks.5 Interest rates fell, giving investors a more positive long-term outlook for growth stocks. Technology stocks benefited from enthusiasm for emerging technologies. Overseas, high levels of local government debt and an overdeveloped real estate market led to uneven growth in China. This unevenness weighed on global market economies with strong trading partnerships with China. For example, Europe’s materials sector likely faltered in reaction to China’s slowing demand for commodities. Should developments in China improve, it could bolster the outlook for many other economies.

Developed international markets outpaced emerging markets for the quarter and year.6 Europe and Japan led the way.7 Surprisingly resilient earnings growth in 2023 drove Europe’s strong performance. Additionally, Europe’s earnings growth outlook for 2024 improved, despite the conflict in Ukraine. Even though European manufacturing lagged, some sectors prospered. Europe’s top performing sector for the year was information technology,8 which benefited from recent interest in developing artificial intelligence technology. In Japan, corporate governance reforms helped corporate profits. Japan also had lower interest rates relative to the rest of the world.

Emerging markets experienced volatility during the year, mainly due to China’s uneven growth. Latin America had the strongest performance. It was aided by Brazil, where falling inflation and lower interest rates helped support growth.9

Bonds posted strong gains in the fourth quarter with high-yield bonds10 outpacing investment-grade bonds.11 Investors grew more confident about the outlook for corporate profits. Rising profits can potentially reduce the risk of default. As a result, corporate bonds were the strongest performing investment-grade bonds.12 

Positioning 

Adjusted positions in an effort to reduce risk.

  • We trimmed exposure to stocks and commodities and favored investment-grade bonds and short-term investments.
  • Within stock and bond allocations, we continued to position accounts closer to benchmarks.

U.S. Stocks

We continued to focus on core, research-driven managers13 and managers who invest in quality stocks.14 Both core managers and quality stocks have historically tended to perform well during late-cycle expansions. During the second half of the year, we increased exposure to low volatility stocks. We also increased some exposure to small and mid-sized company stocks. These companies have attractive valuations relative to large companies.15 This valuation gap may lead to lower volatility or stronger performance for small companies relative to large companies.

International Stocks 

Over the year, we lowered allocations to international stocks. However, during the fourth quarter, we made a small shift from U.S. to international stocks due to their favorable valuations16 and improving earnings expectations. Like U.S. stocks, we also favor core managers and low volatility stocks. We maintained our preference for emerging market stocks over developed international stocks. We believe their long-term outlook appears more favorable.

Within developed international stocks, we kept greater exposure to Canada. Canadian stocks may benefit from some strong consumer businesses and higher commodity prices since commodities are a key industry for that country.

Within emerging market stocks, we favor China despite the country’s uneven economy. Many of our underlying managers believe the outlook for some Chinese businesses remains promising.

Bonds

We added exposure to investment-grade bonds and short-term investments and trimmed high-yield bond exposure. At the end of September, we added a small long-term Treasury position. These investments typically perform well in a slowing growth environment, like late-cycle expansion. Long-term Treasuries returned 12.7% October through December.17

We also took steps to further reduce risk. Within investment-grade bonds, we added to short and intermediate-term Treasuries, as well as high-quality mortgage-backed securities (MBS). Meanwhile, we reduced exposure to bank loans and emerging market bonds. We also reduced exposure to high-yield bonds because they have historically tended to be volatile during late-cycle expansions.

Performance

Market Performance: Quarter and One-Year 2023 Q4

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 12/31/2023. 

Outlook

A healthy jobs market, positive wage growth, and easing inflation may continue to help consumer spending and the economy.

  • Growth may continue but moderate due to expensive borrowing costs at higher interest rates. This could result in fewer purchases for large items like homes and cars.
  • We do not believe recession is imminent.

Recent inflation readings have fallen to levels more typical for the U.S. economy. This likely contributed to the Fed’s decision to end its campaign of interest rate hikes. Consumer sentiment ended the year rising to some of its highest readings for 2023. Since consumer spending is a key driver of U.S. economic growth, this could prove supportive into 2024.

However, the U.S. economy also faces challenges. Manufacturing activity is in decline. Fewer job openings indicate shifts in the job market, even though unemployment remains low.

While we do not believe a recession is imminent, economic uncertainty may lead to bouts of market volatility. These are not unusual during late cycle expansions. That’s why we have positioned client accounts close to benchmarks. We believe this can allow clients to participate in market rallies and potentially experience less volatility during periods of market stress. If needed, we are prepared to adjust risk exposures in client accounts if the economy begins to show signs of stalling.

1. U.S. stocks are represented by the Dow Jones U.S. Total Stock Market Index, international stocks are represented by the MSCI All Country World ex US Index (Net MA Tax), and bonds are represented by the Bloomberg U.S. Aggregate Bond Index, as of 12/31/2023.

2. As measured by the Russell 1000 Growth Index and by the ICB industry breakdown of the Dow Jones U.S. Total Stock Market Index, respectively, as of 12/31/2023. 

3. Dow Jones U.S. Total Stock Market Index returned 26.1% for 2023.

4.  Growth stocks returned 42.7% for 2023 as measured by the Russell 1000 Growth Index.

5. Technology stocks returned 64.4% for 2023 as measured by the ICB industry breakdown of the Dow Jones U.S. Total Stock Market Index.

6. As measured by the MSCI EAFE Index (Net MA Tax) and MSCI Emerging Markets (Net MA Tax), respectively, as of12/31/2023.

7. As measured by the country breakdown of the MSCI EAFE Index, as of 12/31/2023.

8. Information technology stocks returned 39.4% for 2023 as measured by the GICS sector breakdown of the MSCI Europe Index.

9. As measured by the country breakdown of the MSCI Emerging Markets Index, as of 12/31/2023.

10. ICE BofA U.S. High Yield Constrained Index returned 7.1% for the quarter and 13.5% for the year, as of 12/31/2023.

11. Bloomberg U.S. Aggregate Bond Index returned 6.8% for the quarter and 5.5% for the year, as of 12/31/2023.

12. Bloomberg U.S. Corporate Bond Index returned 8.5% for the year, as of 12/31/2023.

13. Core managers invest in stocks based on individual company characteristics, rather than favoring sectors or disciplines.

14. Quality stocks tend to have stable earnings and low levels of debt relative to other stocks.

15. Source: Bloomberg, based on forward price-to-earnings ratios for the S&P 600 Index and S&P 500 Index, as of12/31/2023.

16. Source: FactSet, based on trailing price-to-earnings ratios for the MSCI ACWI ex U.S. Index and the S&P 500 Index, as of 12/31/2023.

17. Bloomberg Long Term U.S. Treasury Index, 10/1/2023-12/31/2023.

* 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 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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