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Investment Commentary


A Message from the Investment Management Team at Strategic Advisers LLC

By Brian Enyeart, CFA®,* President, Strategic Advisers LLC - Fourth Quarter 2019

Fourth Quarter 2019 Key Takeaways


The U.S. economy remains in late-cycle expansion driven by strong consumer spending, but slow global growth is weighing on the pace of U.S. activity.


Stocks and bonds rallied in the U.S. following a shift in policy by the U.S. Federal Reserve to cut rates to provide a boost to borrowing and spending.


The defensive approach’s core holdings, conservative stocks and high-quality bonds, performed well, with quality stocks outperforming broad-market, and Treasuries generating solid absolute returns.

Markets were relatively calm despite ongoing concerns about slowing economic growth and trade uncertainty

A defensive approach to investing:

Seeks to deliver less significant losses during down-markets in exchange for limited gains in up-markets compared to a total return approach.

Slowing economic growth trends, weaker manufacturing activity, and trade uncertainty continued to weigh on investors’ minds in 2019. However, we believe that the U.S. economy remains firmly in late-cycle expansion. This is supported by heathy employment and consumer spending. While markets went through several bouts of volatility during the year, overall performance was strong and relatively steady. In fact, the S&P 500 Index returns remained positive since January 3rd and after October 8th did not suffer a daily loss of more than 1%.

The U.S. Federal Reserve policy shift was key to strong gains

Conservative stocks include:

  • Low volatility stocks - those that have historically experienced relatively low price volatility.
  • Quality stocks - those issued by companies that possess high quality financial characteristics.

We gain exposure to conservative stocks through index funds that are created and customized by Fidelity. This enables us to better control risks and keep costs low.

Entering 2019, the U.S. Federal Reserve (Fed) held interest rates steady. Yet, as the year progressed and the economy continued to slow, they shifted to a stimulative policy by lowering rates. Lower rates can provide a boost to borrowing and spending which can spur economic activity. Ultimately, the Fed cut rates three times, or a total of 0.75%. Additionally, the Fed has signaled that it will take further actions to support the economic expansion, which is now the longest on record.

Quality and broad-market stocks benefitted defensively-managed portfolios

Defensive portfolios hold mostly conservative stocks, like quality and low volatility, which generated strong absolute returns in 2019. Quality stocks returned 9.8% for the quarter and 30.9% for the year.1 Defensive portfolios also hold modest-sized positions in broad-market stocks, which outperformed most types of conservative stocks. While broad-market stocks performed strongly, they did so with higher volatility than conservative stocks. This is why we limit the amount of broad-market stocks we hold. In 2019, broad-market U.S. stock returns outpaced low volatility stocks for the first time in two years.

International stocks pushed higher, but lagged U.S. markets

Like in the U.S., broad-market foreign stocks generally outperformed conservative stocks. However, stock market returns overseas generally lagged U.S. markets. International investors continue to focus on Chinese economic activity. Due to its large size, China has a strong influence on export-oriented economies in many regions, including Europe and the Far East. Recent data out of China suggest that their economy has reaccelerated after a decline over the past year. While it remains to be seen whether China can sustain the uptick in activity, investor sentiment turned positive. This drove international stock prices higher.

High-quality bonds generated positive absolute returns

Fourth Quarter 2019
Account Summary:

  • Over the past year, we’ve steadily managed risk levels lower:
    • We’ve reduced allocations to stocks, and within stocks we’ve shifted to higher quality.
    • We’ve increased allocations to Treasuries (including Treasury Inflation Protected Securities or TIPS) and short-term bonds.
    • Given their outperformance, we chose to reduce exposure to low volatility U.S. and emerging market stocks.
  • Low volatility remains the largest stock allocation in all model portfolios and will continue to be so for the foreseeable future.
  • We are still highly confident that they, and other conservative stocks, will experience muted losses during significant market declines but provide growth to your portfolio.
  • We believe the defensive portfolios are well-positioned to achieve the objectives we’ve laid out.

High-quality bonds were relatively strong and contributed to positive absolute returns. Like stocks, bond returns were driven by the Fed rate cuts, helping yields move lower and prices higher. Furthermore, inflation remained benign which is very important to fixed income investors. That’s because inflation erodes the buying power of the coupon income bonds provide. Additionally, investor’s expectations are for slower economic growth. This mix of conditions led to a meaningful decline in rates all across the maturity spectrum. And, the widespread decline helped fuel strong returns in bonds that are very sensitive to interest rate moves, like U.S. Treasuries.

Treasuries continue to represent the bulk of bond exposure in defensively-managed portfolios

We favor Treasuries because they can offer a high level of safety during turbulent times, given that the U.S. government is highly-rated and has never defaulted on its debt. A period in which stocks tumble and Treasuries rally is known as a “flight to quality” and last occurred during the fourth quarter of last year. Like they did a year ago, we anticipate that Treasuries should help provide defensively-managed portfolios stability and protection for your account.

We continue to emphasize risk management to help mute volatility

Stock market volatility declined in 2019 but still experienced several bouts of volatility. Each time, the defensively-managed portfolios performed in line with our expectations. Namely, losses were muted compared to the overall market. In exchange, gains were less robust when markets recovered. We expect no change to this return pattern going forward.

We believe that slowing economic growth around the world and ongoing trade tensions between the U.S. and China will remain at the top of investors’ minds. At home, the U.S. economy has continued to slow down. Yet, it has been quite resilient, extending its record expansion to over 10 years. This could continue due to the 2019 rate cuts by the Fed. Inflation also remains low, which may give the Fed comfort should further stimulus be required.

Based on this, we believe we are positioning our clients’ accounts with the appropriate level of risk. Our goal is to help clients achieve their long-term financial goals but also to avoid severe financial loses during market turbulence.

Updates on Tax-Sensitive Accounts

  • Lower market volatility in 2019 than in 2018 led to fewer opportunities for tax-loss harvesting across client accounts.
  • Strong demand, lower bond supply, and falling interest rates helped municipal bond performance.
  • Positive economic growth bolstered sales and local tax receipts, which can support both new bond issuances and interest payments on existing bonds.
  • Mutual fund distributions of capital gains were broadly lower in 2019 than in 2018, with U.S. stock mutual funds paying out the most.