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US economy: Still growing, but slowing

Key takeaways

  • The situation with Silicon Valley Bank appears to be isolated, and is not likely to be a sign of systemic issues with the broader US financial system.
  • We do not believe the US is in recession, but rather in late-cycle expansion.
  • The Fed raised interest rates by 0.25% on February 1, but has signaled it may put an end to raising interest rates over the coming months. These actions may provide positive support for both stocks and bonds.

At this time, we believe the US economy is experiencing a late-cycle expansion, not a recession. If the US economy does enter a recession, we would likely seek to further de-risk managed accounts. This may mean further reducing exposure to stocks and adding exposure to bonds.

Silicon Valley Bank appears to be an isolated incident

On March 10, regulators closed Silicon Valley Bank (SVB), which was the 16th largest bank in the nation. We believe the situation with SVB was unique, rather than a sign of systemic issues with the broader US financial system. Large and other mid-sized banks do not appear to be facing the same issues as SVB.

In addition, the US government has rolled out a plan to protect depositors at SVB as well as other banks across the country. Most of our well-diversified managed accounts had very little exposure to SVB, as it made up less than 0.02% of the Dow Jones US Total Stock Market Index. This is an example of why diversification is a critical part of how we help manage risk for our clients.

Our latest thinking on the economy

After a market rally through the end of 2022, the stock and bond markets have experienced a high level of market volatility in February, as the US economy and corporate profit growth have been slowing.

The late-2022 rally isn’t all that unusual, because historically, stocks and bonds have typically risen in value during late-cycle expansions.1 That’s why we’ve been disciplined about maintaining exposure to assets like stocks, commodities, and high-yield bonds, even when news headlines have been challenging.

Despite recent positive returns, we do not believe that the risk of a US recession has entirely gone away. Therefore, we have continued to reduce the level of risk within well-diversified managed accounts. We’ve done this by reducing our exposure to US stocks and high-yield bonds, and adding to high-quality bonds instead, which have historically performed better during most periods of stock market volatility. We also remain well-diversified across US stocks, non-US stocks, bonds, commodities, and alternatives. We believe this level of diversification may help reduce the level of volatility within client accounts during the late-cycle expansion.

As to the risk of a recession, a significant part of our rigorous research process is dedicated to closely monitoring the health of the US economy. In this environment, we are closely following the job market, the outlook for corporate profits, inflation, and interest rates. We also research geopolitical developments to assess their potential impact on the US economy. This approach gives us the confidence to manage the risk level within our managed client accounts as the economic backdrop evolves.

Though we believe the US economy is continuing to experience a late-cycle expansion, if the US economy does enter a recession, we would likely seek to further de-risk client accounts. But just as importantly, we would diligently use our research to uncover opportunities to add stock exposure back to client accounts. That’s because stocks have historically started to recover before recessions have even ended. Not only that, but stocks have historically experienced many of their strongest gains in early-cycle recoveries following recessions.2

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How we continue to position Portfolio Advisory Services managed portfolios

Total return

As we move through late-cycle expansion, we continue to take steps to help manage risk within well-diversified managed accounts. We also rebalance accounts in an effort to keep them in line with the goals and preferences of our clients.

  • US and non-US stocks
    • Reduced exposure to US stocks. Maturing business cycles have historically led to more bouts of market volatility.
    • Slightly increased exposure to non-US stocks, as we believe they appear relatively inexpensive and may benefit from China’s reopening from strict COVID-19 measures.
    • Exposures to different disciplines (growth, value, etc.) are near their benchmark targets, as we are emphasizing core managers who favor stocks with relatively stable earnings.
  • Bonds
    • Added to high-quality bonds, particularly investment-grade bonds. In general, bonds now offer compelling yields3 and have tended to experience less volatility than stocks over time.
    • Reduced exposure to high-yield bonds. We believe these investments may experience more volatility as the business cycle matures.
  • Commodities, real estate, and alternatives
    • Increased positions in commodities since these investments have historically held up well during periods of higher inflation.
    • Sold out of real estate exposure as they have historically experienced more volatility during late-cycle expansions.
    • Maintained exposure to alternatives in some accounts. We believe these types of investments can provide returns that are less correlated to traditional stocks and bonds.
  • Tax efficiency
    • Managed for tax efficiency in taxable accounts that apply tax-smart investing techniques,4 particularly through tax-loss harvesting during periods of stock market volatility.


The defensive portfolio strategy continues to temper volatility during market drawdowns. As always, this portfolio remains defensively positioned. We continue to rebalance portfolios to help ensure risk and return potential remains aligned with client goals and preferences. We also manage for tax efficiency in portfolios where taxes matter.

  • US and non-US stocks
    • Slightly reduced exposure to developed low-volatility international stocks in favor of low-volatility emerging market stocks, which may offer favorable risk-adjusted returns.
    • Shifted some exposure away from higher dividend-paying US stocks to low-volatility US stocks, which we believe may increase defensiveness through diversification.
  • Bonds
    • Increased both exposure to US Treasury bonds and broad-based investment-grade bonds. We believe these investments may provide diversification benefits and may offer attractive risk-adjusted returns through active management.
    • Maintained a significant allocation to US Treasury Inflation-Protected Securities (TIPS). These investments tend to provide protection during periods of rising inflation.
  • Alternatives
    • Reduced exposure to alternative investment strategies in favor of Treasury bonds and broad-based investment-grade bonds.

Make a plan, stick with it, and stay invested

Market conditions can change quickly. Historically, the market has sometimes rallied even as news headlines may have felt discouraging. Despite the rising risk of recession, we want our managed account clients to benefit from market rallies like the one that took place at the end of last year. As a result, we maintain healthy exposure to stocks even through bouts of market volatility. Over time, well-diversified, multi-asset portfolios have generally experienced less volatility than stock-only portfolios. And they have significantly outperformed short-term investments over the long run. That’s why we believe that getting invested and staying invested can help our clients reach their financial goals over the long term.

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1. Fidelity and AART Quarterly Market Update, 1/12/23 2. Stocks are represented by S&P 500 Index; Recession dates based on National Bureau of Economic Research (NBER) for time period 1950-2022, Bloomberg. 3. Based on yield-to-worst for Bloomberg Aggregate Bond index as of 2/28/23 4. Tax-smart (i.e., tax-sensitive) investing techniques, including tax-loss harvesting, are applied in managing certain taxable accounts on a limited basis, at the discretion of the portfolio manager, primarily with respect to determining when assets in a client's account should be bought or sold. Assets contributed may be sold for a taxable gain or loss at any time. There are no guarantees as to the effectiveness of the tax-smart investing techniques applied in serving to reduce or minimize a client's overall tax liabilities, or as to the tax results that may be generated by a given transaction.

Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.

Neither asset allocation nor diversification ensures a profit or protects against loss.

Past performance is no guarantee of future results.

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.

Stock markets, especially foreign markets are volatile and can decline significantly in response to adverse issuer, political regulatory, market or economic developments. Indexes are unmanaged. It is not possible to invest directly in an index. The commodities industry can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions.

Changes in real estate values or economic conditions can have a positive or negative effect on issuers in the real estate industry.

The S&P 500 Index is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent US equity performance. The MSCI All Country World Ex-US Index (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. The Bloomberg US Aggregate Bond Index is a broad-based, market-value-weighted benchmark that measures the performance of the US dollar-denominated, investment-grade, fixed-rate, taxable bond market. Sectors in the index include Treasuries, government-related and corporate securities, mortgage-backed securities (MBS) - agency fixed-rate and hybrid ARM pass-throughs -asset-backed securities (ABS), and commercial mortgage-backed securities (CMBS). The views expressed in the foregoing commentary are prepared by Strategic Advisers LLC. based on 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.
This material may not be reproduced or redistributed without the express written permission of Strategic Advisers LLC.
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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