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Investment Commentary


A Message from the Investment Management Team at Strategic Advisers LLC

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

Fourth Quarter 2019: Market Summary


U.S. stocks, international stocks, and bonds all rose during the year, supported by U.S. Federal Reserve rate cuts and receding concerns about a global economic slowdown.


U.S. consumer confidence and spending remained resilient, supported by a strong jobs market and rising wages. Meanwhile, late-cycle tensions led to slow corporate profit growth.


Improvement in the outlook for the world’s second biggest economy could help boost many export-oriented economies, such as Germany, Japan, and South Korea.

Good year for growth and quality stocks, while value stocks picked up in the final months

Fourth Quarter 2019: Account Summary

U.S. Stocks:

  • Increased allocations to high-quality U.S. stocks, which tend to perform well in late cycle.

International Stocks:

  • Exposure to outperforming international quality-growth stocks helped performance.
  • Within emerging markets, emphasized funds with dedicated China research, which helped client accounts as local China stocks outperformed.


  • Increased exposure to investment-grade bonds and defensive-oriented high-yield bonds, to help manage risk levels.

Over the last year, U.S. stocks rose 30.9%.1 A reversal in U.S. Federal Reserve policy and continued economic growth helped drive markets higher.

  • Growth stocks continued their multi-year outperformance by gaining 36.4%.2
  • Value stocks outpaced growth stocks in the final months of 2019 and finished the year up 26.5%.3 Value stocks tend to do well when economic growth is on firmer footing.
  • Quality stocks, which are companies with low debt and stable earnings, returned an impressive 39.1%.4
  • Low-volatility stocks lagged the broader market, but were still up 27.1%.5

Periods of market volatility in May and August of last year provided opportunities for us to rebalance client accounts. Our disciplined rebalancing process helped to:

  • Keep the investments in your account aligned to your financial goals.
  • Find opportunities to buy stocks at lower prices after some market declines. These opportunities led to investment gains as stocks recovered.

We are avoiding defensive stocks while increasing quality stocks, which are cheaper and higher growth

Our research has shown that certain types of stocks perform well depending on the phase of the business cycle. For example, we believe companies with high-quality characteristics may perform well during the late phase of the business cycle. Therefore, we increased allocations to high-quality stocks over the last few years.

At various times over the last two years, defensive stocks, such as utilities, have performed well as investors sought safer investments amid fears of recession. However, we have generally avoided defensive stocks because we believe that these areas of the market are expensive and slowgrowing. In our view, quality stocks are more reasonably priced than defensive stocks, and have higher long-term growth rates.

International growth stocks made a strong showing for the year, and China mattered

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 highest amounts.

After a modest start, international stock returns improved in the final months of 2019. For the year, developed markets outperformed emerging markets. Overall, our international stock funds have strongly outperformed both developed and emerging market indexes.

In 2019, client accounts particularly benefited from our strong allocations toward international quality-growth stocks. That’s because in an uncertain economic environment, earnings growth can become harder to find. Investors then seek out companies with low levels of debt, stable earnings, and a positive growth outlook.

Within emerging markets, the size of an investor’s exposure to China mattered in 2019. China makes up a significant percentage of emerging market stocks. Over the last few years, we’ve emphasized emerging market managers with a dedicated China research focus. This focus helped client accounts because local China stocks have outperformed most other areas of the Chinese market. This is particularly true for technology and consumer stocks.

Strong year for treasuries and corporate bonds as rates fell and the U.S. economy remained resilient

Overall, bonds experienced strong performance with a return of 8.7%6 for the year. As interest rates fell, and fears of a more significant economic slowdown receded, both U.S. Treasuries and corporate bonds performed well. Strong corporate bond performance may indicate that businesses are healthy and corporate earnings are stable, leaving investors less concerned about possible bond defaults.

Historically, stock market volatility can rise during the late phase of the business cycle. As a result, we’ve lowered risk levels in most client accounts by reducing exposure to stocks, high-yield bonds, and commodities. Instead, we have increased exposure to investment-grade bonds.

Additionally, within our small allocations to high yield, we have sought to own more defensive-oriented high yield bonds. These positions have benefitted client accounts, as our investments in both investment-grade bonds and high-yield bonds outperformed their broader indexes for the year.

Our outlook: Keeping an eye on corporate profits, wages, China, and more

As 2020 progresses, we will continue to monitor employment, wages, and other factors that may influence consumer-spending patterns. We will also look for changes in the pace of economic growth and corporate profits. Our research tracks economic indicators and confirms these indicators using company-specific and real world signals.

Outside of the U.S., some key areas that we are following within China include:

  • Stabilizing industrial activity
  • Subdued credit growth
  • Remaining trade tensions with the U.S.

Due to the size of the Chinese economy and its importance to other countries, developments in these areas may be critical to the global economy in 2020.

We remain dedicated to watching for shifts in the economy that will help inform the prudent investment decisions that we make on your behalf.