Fidelity® Wealth Services
A Message from the Investment Management Team at Strategic Advisers LLC
Brian Enyeart, CFA,* President, Strategic Advisers LLC – Fourth Quarter 2020
- Market Backdrop: The global economy’s early cycle recovery has continued, despite uncertainty around the COVID-19 pandemic and the U.S. political landscape.
- Positioning: We increased exposure to stocks and high-yield bonds. Meanwhile, we reduced exposure to investment-grade bonds and short-term investments.
- Performance: Large-growth companies led the way for the year as U.S. stocks climbed higher. International stocks also experienced gains. Meanwhile, bonds delivered exceptionally strong returns.
- Outlook: Covid-19 vaccines could lead to an improving global economic environment in 2021.
Most major global economies closed the year in early cycle recoveries
- Unemployment fell, consumer spending rose, and global manufacturing improved.
- Historically, a recovering global economy has led to positive investment performance.
Although U.S. economic activity has not yet returned to previous highs, we witnessed several signs of recovery. For instance, unemployment fell from nearly 15% in the spring to below 7%.1 Consumer spending, which accounts for nearly 70% of annual U.S. economic growth, rose significantly since April. Likewise, global manufacturing activity steadily improved since the initial shock of the pandemic in the spring.
Some investors worried that a resurgence in COVID-19 cases, and uncertainty surrounding the U.S. elections, would hinder growth. Yet most investors experienced healthy gains in 2020. As the year came to a close, the U.S. economy remained in the early recovery phase of the business cycle. Historically, early cycle recoveries have driven gains for investors. They have also preceded expansions that have often lasted for years.
We favored stocks over bonds and short-term investments
- We added to positions in stocks and high-yield bonds, which may benefit from an economic recovery.
- We reduced exposure to investment-grade bonds and short-term investments, which may lag stocks.
- Within stock funds, we modestly rebalanced our positioning away from growth funds.
Within client portfolios, we further increased exposure to stocks. And, we reduced exposure to bonds relative to each client’s long-term target asset allocation mix. We believe that stocks, real estate investments, and high-yield bonds may benefit more from the economic recovery than investment-grade bonds and short-term investments.
After their strong performance in 2020, some growth stocks became relatively more expensive compared to the broader market. Therefore, we modestly reduced our exposure to growth fund managers. We have increased some exposure to core fund managers. Core stocks may have more attractive valuations than growth stocks and therefore, may outpace them. We also increased exposure to funds that invest primarily in small- and mid-sized companies. They have historically outperformed larger-company stock funds during early-cycle recoveries.
We expanded exposure to both international developed and emerging-market stocks during the quarter. We believe stocks overseas may benefit from economic recoveries taking place around the world. In fact, financial industry analysts expect stronger earnings growth overseas than in the U.S. Moreover, international stocks are generally trading at lower valuations than U.S. markets. Therefore, these stocks may experience strong performance in 2021.
High-yield bonds have historically experienced strong performance during economic recoveries. Therefore, we increased our exposure there and reduced exposure to investment-grade bonds. Within investment-grade bonds, we helped reduce risk by increasing exposure to intermediate-duration treasuries. They offer modest yields but may provide a buffer against stock market volatility.
Performance for 2020 was positive across most stock and bond markets
- Stocks outperformed bonds.
- U.S. stocks outpaced international markets.
- Bonds experienced strong gains for the year.
Rapid intervention by governments and central banks around the world have helped the stock market recover since April. Over the last year, large growth stocks led U.S. stock performance, while value stocks lagged. As for international stocks, emerging markets2 outperformed large developed markets.3
- Market volatility in March presented significant tax-loss harvesting opportunities early in the year. There were fewer such opportunities the rest of the year as stocks moved mostly higher.
- Municipal bonds returned 5.2%5 for the year, as investor demand rebounded over the summer and supply remained tight.
The vaccine rollout may lead to global economic and earnings recoveries
- Consumer spending may boost earnings for a wide range of businesses globally.
- Yet risks remain, and taking a diversified, disciplined investment approach may help you reach your goals.
As vaccines come to market and gradually reach individuals around the world, we believe that the global economy may experience strong growth in 2021. Through a combination of lower spending and government cash distributions, U.S. consumers have increased their savings by nearly 1 trillion dollars since the pandemic.6 Post-pandemic, increased consumer spending may lead to strong earnings growth for many businesses.
For investors who focus on the long term, there may be opportunities to invest in businesses that can thrive in this improving environment. These new opportunities may not be the same as those investments that excelled during a stay-at-home environment.
Yet we are also mindful that risks for investors haven’t disappeared. Questions remain around the direction of policy in Washington DC. Congress continues to be closely divided and political tensions can run high. We may also see uncertainty on the pace of the vaccine rollout, a slower jobs recovery, or lower consumer spending than expected.
Therefore, we’ll continue to conduct deep research into investment opportunities, including closely following policy changes that could impact your account. We’re also maintaining a diverse mix of stock and bond investments to help provide a smoother investment experience through bouts of market volatility. We believe our disciplined process may help you reach your financial goals.