Quarterly Investment Review

A message from the Investment Management Team of Strategic Advisers LLC

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

Second Quarter 2019: Key Takeaways


While uncertainty surrounding economic growth has led to periods of volatility, most investors experienced gains during the quarter.


The United States continues to remain a generally positive environment for stocks and bonds, even as slowing economic growth may lead to greater potential for market volatility.


The U.S. Federal Reserve (the Fed) may shift interest rates lower to address slower economic growth and the impact from global trade tensions.

Stocks and bonds rose in spite of occasional volatility 

  • Both U.S. and international stocks were up for the quarter, led by the United States. As a result, most client accounts benefitted from having more stocks in their portfolios than bonds. 
  • Within international stocks, developed markets nearly kept pace with the United States, while emerging markets lagged, mostly as a result of uncertainty surrounding U.S. and Chinese trade negotiations. 
  • Bonds experienced strong gains, with both corporate bonds and investment grade bonds finishing ahead of high-yield bonds for the quarter. 

U.S. economy remains firmly in late-cycle economic expansion

  • U.S. economic growth remains positive, but the pace of growth appears to be slowing.
  • Positive economic growth may continue to support U.S. stocks.
  • We believe that investor returns may be moderately positive, but with potentially greater market volatility.

Within the United States, employment remains healthy, while wage growth appears lower than in previous decades. In relation to slower wage growth, we continue to see muted inflation, which has helped lead to historically low interest rates. As a result, this environment may provide support for further economic growth, as consumers and businesses continue to borrow. Additionally, corporate earnings are expected to grow in 2019, though at a slower rate than previous years, which is consistent with a late-cycle environment. Late cycle is also a phase in which we see a wider range of potential market and economic outcomes.

Given the current market environment, we have taken a number of steps to gradually reduce risk within client portfolios. For instance, we reduced exposure to international stocks and increased exposure to investment grade bonds, which may provide stability in the face of late-cycle volatility. Moreover, we have rebalanced client portfolios by selling stocks at a gain and buying investment grade bonds to maintain a mix of stocks and bonds aligned to each client’s financial goals.

Domestic stocks moved higher

U.S. stocks were up 4%¹ for the quarter, in spite of some market volatility, and were up 9% from last year. Within U.S. stocks, client portfolios benefited from greater exposures to financial, technology, and consumer stocks. Portfolios have also benefited from increased momentum exposure, meaning stocks with rising earnings and prices. Furthermore, defensive and dividend yield sectors of the market, such as staples or utilities, also performed well. However, our portfolios tend to have less exposure to these areas, so these returns actually hindered client performance.

International developed market stocks performed well, while emerging markets stocks were nearly flat

International stocks witnessed strong performance with an increase of 3%² for the quarter. Within international stocks, developed markets stocks gained 4%³, while emerging markets returned less than 1%4 over the quarter. Both European and Australian stocks boosted developed markets’ performance, along with exposure to technology, industrial, and consumer stocks. Client portfolios benefited this quarter from investment managers favoring growth and quality stocks. Generally speaking, quality stocks typically have more consistent earnings growth, higher return on equity, and lower levels of debt compared with the broader market. Historically, quality stocks have held up well in late cycle.

Within emerging markets, China and South Korea dragged down stock returns, as economic activity in southeast-Asia slowed in the face of global trade tensions. After what appeared to be constructive trade talks for much of 2019, trade tensions re-emerged in mid-May, when negotiations between U.S. and Chinese officials stalled. This led emerging market stocks to falter in May before recovering somewhat in June.

Bonds delivered strong returns as interest rates drifted lower

Bond investments had a strong quarter with an overall gain of 3%5 and an increase of 8% over the last year. Due to low levels of inflation and a mixed growth outlook, bond yields fell, leading to higher bond prices. Client portfolios benefited from our higher allocation to corporate bonds. In fact, corporate bonds led the way versus other bonds by gaining over 4%6 over the quarter. High yield bonds gained 3%7, but lagged investment grade bonds as market volatility hindered performance, particularly for bonds within the energy sector. Treasuries were also up, gaining over 2%8.

Federal Reserve policy may shift in response to slower growth and global trade disputes

The Fed has indicated they may consider the prospect of lowering interest rates in response to slower growth, low inflation, and global trade tensions. Lower interest rates could help support the U.S. economy. However, given that the U.S. economy is in the late-cycle phase of the business cycle, there is greater uncertainty surrounding the outlook for economic growth. This could lead to periods of market volatility. Looking ahead, we will closely follow the Fed’s actions, along with other developments in the U.S. economy. Based on our rigorous research on where the U.S. is within the business cycle, we will make adjustments to client portfolios as needed.

* 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 MSCI ACWI (All Country World Index) ex USA (Net MA)

3 MSCI EAFE Index (Net MA)

4 MSCI Emerging Markets Index (Net MA)

5 Bloomberg Barclays U.S. Aggregate Bond Index

6 Bloomberg Barclays U.S. Credit Bond Index

7 ICE BofAML U.S. High Yield Constrained Index

8 Bloomberg Barclays U.S. Intermediate Treasury 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.

MSCI ACWI (All Country World Index) ex USA (Net MA) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid-cap stocks in developed and emerging markets, excluding the United States.

MSCI EAFE Index (Net MA) is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors in developed markets, excluding the United States and Canada. Index returns are adjusted for tax-withholding rates applicable to U.S.-based mutual funds organized as Massachusetts business trusts.

MSCI Emerging Markets Index (Net MA) is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of emerging markets.

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.

Bloomberg Barclays U.S. Credit Bond Index measures the investment grade, US dollar-denominated, fixed-rate, taxable corporate and government related bond markets. It is composed of the US Corporate Index and a non-corporate component that includes foreign agencies, sovereigns, supranationals and local authorities.

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%.

Bloomberg Barclays U.S. Intermediate Treasury Bond Index includes public obligations of the U.S. Treasury. Treasury bills are excluded by the maturity constraint but are part of a separate Short Treasury Index. In addition, certain special issues, such as state and local government series bonds (SLGs), as well as U.S. Treasury TIPS, are excluded. STRIPS are excluded from the index because their inclusion would result in double-counting. Securities in the Index roll up to the U.S. Aggregate, U.S. Universal, and Global Aggregate Indices.

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.


What happens when the Fed cuts interest rates?

The Fed has recently indicated that it may lower interest rates. Historically, the Fed has cut interest rates in response to signs of slower economic growth. This is because lower interest rates can help businesses and consumers borrow more money, which in turn, may lead to higher economic growth.

It is true that, historically, the Fed has sometimes cut interest rates heading into recessions. However, lower interest rates have not always led to economic declines. For instance, the Fed cut interest rates in the mid 1990’s, and again in the late 1990’s. Both times, stocks rallied, and the economy experienced no immediate recession.

Therefore, we do not believe that Fed interest rate cuts are reason enough to reduce risk. Instead, we will follow our process of understanding where the U.S. economy is within the business cycle to manage our client’s accounts.

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