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Quarterly Investment Review

A message from the Investment Management Team of Strategic Advisers, Inc.

By Brian Enyeart, CFA®,* President, Strategic Advisers, Inc.

Q2: Key Points during the Quarter

    U.S. economic growth led domestic stocks higher, but bonds fell slightly. International stocks declined as industrial activity slowed in some key regions, like China.
    The United States remains in a mature phase of economic growth, supported by rising corporate earnings and a healthy labor market.
    We are closely following developments on global trade and central bank policies related to interest rates, as they could affect global economic growth.

U.S. stocks fared better than those overseas

Domestic stocks advanced over the last few months, supported by a healthy U.S. economy and rising corporate profits. However, stock markets did experience some volatility, driven by global trade uncertainty and other geopolitical concerns. Meanwhile, international stocks fell slightly during the quarter. While economic growth overseas remains mostly positive, there were signs of some slowing in key regions, such as China. Nonetheless, over the last 12 months, international stocks have delivered solid gains for investors. Finally, bond performance declined because of a modest uptick in interest rates, which was a reflection of a healthy U.S. economy. As a result, some inflation measures moved slightly higher.

Continued mature expansion, but watching for signs of moderation

We believe that the United States is in a mature phase of economic expansion. Strong corporate earnings, high levels of business and consumer confidence, and a healthy labor market are all supporting growth. However, in our view, this level of economic activity is likely to moderate over time. Factors such as Federal Reserve (Fed) and other global central bank policies, in addition to ongoing global trade developments, have the potential to affect economic activity around the world. In spite of these potential concerns, our view is that the economic environment remains largely positive for most countries. Thus, we continue to emphasize stocks over bonds within most managed accounts.

Domestic stocks rose 3.9%1

U.S. stock markets rebounded in the second quarter after beginning the year nearly flat. Strong corporate earnings helped limit the impact of recent volatility caused by trade negotiations and geopolitical concerns. That being said, while we do not expect an all-out trade war, we are monitoring the potential impact of tariffs on U.S. multinational corporations, given that nearly half of the revenues of companies in the S&P 500® Index come from overseas. Trade uncertainty actually helped stocks of smaller U.S. companies gain 7.8%2 for the period, as such stocks typically rely less on international sales to be profitable.

We modestly repositioned the domestic stock fund exposure in most client accounts during the quarter. This included shifting some large-cap domestic stock investments to those that have a smaller-company focus. Additionally, our tilts toward growth- over value-oriented stock investments remained in place and added to returns in the last few months.

International stocks fell 2.5%3

Overseas, stock markets were hampered this past quarter by global trade concerns, slowing industrial activity across key regions like China, and a strong U.S. dollar. While performance in developed international markets, such as Europe and Japan, failed to keep pace with the United States, it was emerging-market economies that bore the brunt of the decline, retreating 7.9%.4 Political turmoil weighed on returns in countries like Brazil and Turkey. Other emerging markets like China and India also fell, but considerably less because of government efforts aimed at providing economic stability.

We modestly lowered international stock fund exposure in most client accounts during the quarter. This is because the U.S. dollar strengthened in recent months, which can weigh on international stock returns when translated back into U.S. dollars. The strong dollar was driven by the positive pace of U.S. economic growth versus many other global economies, as well as by higher interest rates. Despite this small reduction in exposure to international stock investments, we believe that they offer long-term growth opportunities for investors and remain a key component of your account.

Bond returns were down slightly

The Fed’s second interest rate hike of 2018 took place in mid-June, and measures of inflation also moved slightly higher over the last few months. This resulted in higher interest rates for the quarter and a small decline of 0.2%5 for investment-grade bond investments. However, high-yield bonds advanced 1.0%,6 as strong earnings supported corporate balance sheets.

Throughout the quarter, we repositioned some of the bond investments within your account to increase exposure to investment-grade bonds. Higher-quality bond investments can provide stability to a portfolio during periods of stock market volatility, which can be more common during mature stages of U.S. economic growth. Additionally, we strive to maintain a diverse mix of bond investments within your managed account, as certain types of bonds fare better than others in a rising interest rate environment. Finally, while rising rates can weigh on bond prices in the short term, the higher interest payments they provide over time can actually benefit long-term investors.

Varied returns for alternative investments

Consistent with their diversification qualities and differing objectives, the portfolio’s alternative investments had varied performance during the quarter. Positions in both domestic and international real estate investments generated strong gains for the period. More specifically, domestic real estate investments benefitted from continued underlying strength in the economy. A backdrop of higher oil prices helped those funds with more exposure to natural resource companies within the energy segment of the market. Conversely, commodity funds that own a broad-basket of investments, including industrial metals and agriculture, posted weaker returns due to higher supply as well as questions regarding overseas growth. Finally, certain multi-strategy and market neutral funds that seek to identify and invest in market trends within global bonds and commodities had more challenged returns given market instability in these areas during the period. Over time, we continue to maintain exposure to alternative investment strategies in your account based on their ability to help provide differentiated sources of returns during certain phases of the business cycle when compared to more traditional stock and bond funds.


With the U.S. economy on sound footing, the Fed has been slowly removing the extraordinary monetary support that it put into place after the last recession. The Fed’s policies had kept interest rates extremely low while the economy recovered. The Fed is now moving away from those policies and focusing on keeping inflation in check. Other global central banks are just beginning to “tighten” financial conditions. For example, the European Central Bank is planning to slow its own bond-buying program later this year. We expect that these policy moves could further reduce money flow into the global economy. Therefore, we are closely watching the pace of central bank policy adjustments, such as interest rate hikes. These changes have the potential to affect global economic growth.


Since the start of the year, a host of global trade disputes have been in the headlines. Examples include U.S. tariff announcements on steel and aluminum, discussions on trade between the United States and China, and ongoing NAFTA negotiations. We believe that an all-out trade war is unlikely. However, global trade could affect the pace of global growth. Our approach to these events is to understand the implications for the global economy, corporate earnings, and investment valuations. Should our views change in the coming months, we would seek to adjust positions within client accounts accordingly. At this time, we believe that the economic backdrop is positive for most countries around the world. Therefore, to date, we have not made significant changes to the investment mix within client accounts.

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