Performance | Tuesday, April 12, 2022

Schwab Intelligent Portfolios & Q1 2022 Market Performance¹

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Key Points

  • U.S. stocks, as measured by the S&P 500® Index, stumbled into the new year with the first 10% correction and first negative quarter in two years amid a host of uncertainties.

  • Fundamental index ETFs continued to add value through diversification, holding up better than their market cap counterparts as performance leadership shifted toward value-oriented stocks.

  • Fixed income investments were also modestly negative for the quarter due to the rising interest rate environment. However, they held up better than stocks and helped moderate overall portfolio declines, illustrating why they remain an important part of a diversified portfolio. 

  • Defensive assets played their role amid the turbulence. Cash provided its intended stability and gold was the top performer, delivering a positive return amid the flight to safety.

  • Schwab Intelligent Portfolios® saw modestly negative returns as both stocks and bonds came under pressure during the period. However, diversification helped mitigate portfolio declines. 

How did financial markets do in Q1 2022?

The first quarter of 2022 brought a host of uncertainties and the first market correction for U.S. equities since Q1 2020. Market volatility returned amid persistently elevated inflation, the first Federal Reserve rate hike since 2018 and rising geopolitical risks with the war in Ukraine.  

In the wake of its strong 2021 return, the U.S. stock market stumbled into the new year with its first 10% pullback and first negative quarter in two years. Many of the large consumer technology growth stocks that powered the market in recent years tumbled as interest rates moved higher. International stocks also posted negative returns for the quarter amid the volatility, with emerging markets among the bottom performers.

However, fundamental index ETFs, which select and weight companies in the index by fundamental measures of company size such as sales, cash flow and dividends, held up better than their market-capitalization-weighted counterparts as performance leadership shifted toward value-oriented stocks. Schwab Intelligent Portfolios includes both market cap ETFs and fundamental ETFs for the five major equity asset classes to provide enhanced diversification as different investment styles move in and out of favor over time. 

Fixed income investments were also modestly negative for the quarter due to the rising interest rate environment. However, they held up better than stocks and helped moderate overall portfolio declines, illustrating why they remain an important part of a diversified portfolio. Near the end of the quarter, the yield curve, or the difference between long- and short-term rates, briefly inverted. This phenomenon has historically tended to precede recessions, though the potential for a recession as well as potential timing remains highly uncertain. On a positive note, defensive assets played their role amid the turbulence. Cash provided its intended stability, and gold was the top performer, delivering a positive return amid the flight to safety.

Figure 1: Market performance (ranked by Q1 2022 total return)

  Index total returns (%)
Asset class Q1 2022 1-Year 3-Year (annualized)
Gold & other precious metals 5.8 12.0 13.8
U.S. real estate investment trusts (REITs) -1.9 28.2 11.7
U.S. large cap stocks -2.5 18.3 19.8
Emerging markets bonds -2.7 -0.4 2.6
Treasury Inflation Protected Securities (TIPS) -3.1 4.1 6.2
U.S. small cap stocks -4.8 -0.2 12.8
High-yield bonds -5.1 -1.2 3.8
International large cap stocks -5.2 1.6 8.0
U.S. Treasuries -5.3 -5.6 1.0
Securitized bonds -5.4 -5.2 0.5
Municipal bonds -6.4 -4.7 1.5
Emerging markets stocks -7.4 -11.4 4.8
International small cap stocks -7.7 -2.9 8.8
Investment-grade corporate bonds -7.8 -4.3 2.7

Source: Morningstar Direct, as of March 31, 2022. Performance figures shown are total returns for each asset class during the designated period. Indexes used are: Gold and other precious metals, LBMA Gold Price PM; U.S. real estate investment trusts, S&P United States REIT Index; U.S. large cap stocks, S&P 500® Index; Emerging markets bonds, Bloomberg Emerging Markets Local Currency Government Bond Index;  Treasury Inflation Protected Securities, Bloomberg TIPS Index; U.S. small cap stocks, Russell 2000® Index; High-yield bonds, Bloomberg High Yield Very Liquid Index; International developed market large cap stocks, MSCI EAFE Index; U.S. Treasuries, Bloomberg U.S. Treasury 3-7 Year Bond Index; Securitized Bonds, Bloomberg Securitized Index; Municipal bonds, Bloomberg Municipal Index; Emerging markets stocks, MSCI Emerging Markets Index; International developed market small cap stocks, MSCI EAFE Small Cap Index; Investment-grade corporate bonds, Bloomberg U.S. Corporate Credit Index. Past performance does not guarantee future results. Indexes are unmanaged and cannot be invested in directly.

Staying focused on longer-term goals is key

Taking a longer-term view, the table above illustrates why it's important to stay focused on your longer-term goals during inevitable market turbulence. While both stocks and bonds saw pressure during the quarter, all asset classes included in the table delivered positive annualized returns over the 3-year period. While different asset classes constantly move up and down the performance rankings as markets fluctuate, over the long run they all have positive expected returns. Rather than trying to time markets, investing in a diversified portfolio is designed to help ensure that you're invested in some of the top performers at any given time and not overly concentrated in the bottom performers.  

How did Schwab Intelligent Portfolios do?

For Schwab Intelligent Portfolios, returns were modestly negative with less differentiation than usual across the risk spectrum for Q1 2022 as both stocks and bonds came under pressure during the period. However, diversification helped mitigate overall portfolio declines. Conservative portfolios saw the least amount of volatility due to their emphasis on more stable bonds and cash. Moderate portfolios saw modestly higher volatility. And Growth portfolios saw the most volatility, though they ended up with similar returns as moderate and conservative portfolios due to a stock market rally in the final days of the quarter.

Looking ahead to Q2 2022

Moving into the second quarter of 2022, markets are likely to remain volatile as the Fed continues to raise interest rates to help rein in inflation and as the outcome of the war in Ukraine remains uncertain. Recession risk has risen, but economic growth remains solid, and unemployment has fallen to its lowest level since the onset of the pandemic in early 2020. The surge in oil prices has pushed gas prices higher, denting consumer confidence and adding to inflation pressures. However, longer-term inflation expectations remain anchored, and the current elevated rates are expected to moderate in the second half of the year.

While periods of market turbulence can be challenging, it's important to recognize that markets are volatile by nature and corrections are inevitable from time to time. These periods underscore why it's important to stay focused on your longer-term goals and what you can control, such as investing in a diversified portfolio, rebalancing as markets fluctuate and keeping costs low. These are among the keys to long-term investment success.

David Koenig CFA®, FRM®, is Vice President and Chief Investment Strategist for Schwab Intelligent Portfolios