Schwab Intelligent Portfolios & Q3 2020 Market Performance¹
Transcript of the video:
The U.S. stock market saw strong gains through most of Q3, reaching a new all-time high before September brought renewed volatility.
The big consumer technology stocks that have powered the market rebound saw a significant pullback in September, resulting in a correction for the Nasdaq index.
Other segments of the global markets, such as small cap stocks and international stocks, remained in the red YTD as of the end of Q3.
Fixed income asset classes saw moderate returns in Q3, but remain among the top-performing asset classes YTD along with gold.
More aggressive portfolios did best in Q3 as stocks outperformed bonds during the quarter; however, conservative portfolios had the strongest returns YTD as bonds remain among the top performers so far in 2020.
How did financial markets do in Q3 2020?
Following the summer's strong market gains, September lived up to its reputation for volatility and brought the first negative month for the U.S. stock market since March. However, the full third quarter saw strong returns, including a new record high, and ended with the S&P 500® Index up about 50% from its March low and in positive territory YTD.
Notably, the September volatility brought a significant pullback for the big consumer technology stocks such as Apple, Amazon and others that have powered the rebound, resulting in a more than 10% correction for the tech-heavy Nasdaq index. It's also important to recognize that while those companies have pushed the S&P 500 into positive territory YTD, other segments of the global markets such as small cap stocks and international stocks remain negative YTD.
Fixed income asset classes also saw positive, though generally more moderate, returns during the quarter. High-yield bonds, which have more equity-like characteristics, were the top performer among fixed income, while core bonds such as Treasuries and investment-grade corporates saw smaller gains. However, defensive investments such as Treasuries and gold, along with other fixed income asset classes, remain among the top performers YTD. Real estate investment trusts (REITs) have come under significant pressure in 2020 due to concerns about the pandemic's effect on lease payments as well as other issues, though they represent small allocations in the portfolios.
Figure 1: Market Performance (Ranked by Q3 2020 total return)
|Index total returns (%)|
|Asset classes||Q3 2020||YTD 2020||3-Year
|International small cap stocks||10.2||-4.2||1.4|
|Emerging markets stocks||9.6||-1.2||2.4|
|U.S. large cap stocks||8.9||5.6||12.3|
|Gold & other precious metals||6.7||24.6||13.7|
|U.S. small cap stocks||4.9||-8.7||1.8|
|International large cap stocks||4.8||-7.1||0.6|
|Treasury Inflation Protected Securities (TIPs)||3.0||9.2||5.8|
|Emerging markets bonds||1.8||-1.6||2.1|
|U.S. real estate investment trusts (REITs)||1.6||-17.1||0.2|
|Investment-grade corporate bonds||1.5||6.4||6.2|
Source: Morningstar Direct, as of September 30, 2020. Performance figures shown are total returns for each asset class during the designated period. Indexes used are: U.S. small cap stocks, Russell 2000® Index; U.S. large cap stocks, S&P 500® Index; International developed market small cap stocks, MSCI EAFE Small Cap Index; Emerging markets stocks, MSCI Emerging Markets Index; International developed market large cap stocks, MSCI EAFE Index; U.S. real estate investment trusts, S&P United States REIT Index; Gold and other precious metals, LBMA Gold Price; High-yield bonds, Bloomberg Barclays High Yield Very Liquid Index; Investment-grade corporate bonds, Bloomberg Barclays U.S. Corporate Investment Grade Index; Emerging markets bonds, Bloomberg Barclays Emerging Markets Local Currency Government Bond Index; Treasury Inflation Protected Securities, Bloomberg Barclays TIPS Index; Municipal bonds, Bloomberg Barclays Municipal Index; Securitized Bonds, Bloomberg Barclays Securitized Index; U.S. Treasuries, Bloomberg Barclays U.S. Treasury 3-7 Year Bond Index. Past performance does not guarantee future results. Indexes are unmanaged and cannot be invested in directly.
How did Schwab Intelligent Portfolios® do?
As with the markets, Schwab Intelligent Portfolios saw strong gains across the risk spectrum in Q3.
• Conservative portfolios saw small but positive returns in Q3 as stocks outperformed bonds during the quarter. However, conservative portfolios have the strongest gains YTD as bonds remain among the top-performing asset classes so far this year.
• Moderate portfolios saw solid gains during Q3, benefiting from their balanced mix of stocks and bonds. Those gains continued to erase most of the losses for these portfolios YTD despite their moderate exposure to asset classes such as small cap stocks and international stocks that were still in the red YTD at the end of the quarter.
• Growth portfolios saw the strongest returns in Q3 due to their larger allocations to stocks, narrowing their YTD losses. Though sizable allocations to small cap stocks and international stocks, which saw the largest declines in the Q1 sell-off, continued to weigh on YTD returns.
For all investors, the sharp decline and rebound this year underscores why it's so important to invest in a diversified portfolio based on your goals and risk profile and to stay the course and remain focused on those longer-term goals when markets turn volatile.
Knowing which type of portfolio is most appropriate for you is a matter of understanding your goals and risk tolerance. Schwab Intelligent Portfolios is designed to recommend a portfolio consistent with your objective, time horizon and ability and willingness to take risk. Whether you're recommended to invest in a more conservative or more aggressive portfolio is based on your answers to our online investor profile questionnaire. We recommend that you revisit the questionnaire at least annually to ensure that your portfolio continues to be suitable based on your current goal, time horizon and risk tolerance.
Looking ahead to Q4 2020
Despite the economic and political uncertainties, we believe the improving global economy should sustain the recovery, albeit at a potentially slow pace. After having plunged into a deep hole in the first half of the year, the economy showed signs of recovery in Q3. Unemployment has come down as economies and businesses have gradually reopened. However, millions of workers remain jobless, and economic growth remains fragile amid the continued uncertainty over the pandemic. After unprecedented stimulus from the Federal Reserve and Congress earlier in the year, lawmakers have so far failed to come to an agreement on additional aid for unemployed workers, struggling businesses, and state and local governments.
The economic uncertainty combined with the political uncertainty ahead of the November election and the potential timeline for a Covid-19 vaccine are likely to keep market volatility elevated in coming months and quarters. The remarkable number of events so far in 2020 — from a global pandemic, extreme market volatility, an economic shutdown and recession, and more — underscore why it's so important to have a financial plan to help guide you through turbulent times. In these challenging times, it's particularly important to focus on what you can control. Time-tested principles such as investing in a diversified portfolio based on your goals and risk profile, rebalancing periodically, keeping costs low, and ignoring short-term market noise are among the keys to long-term investment success.
David Koenig CFA®, FRM®, is Vice President and Chief Investment Strategist for Schwab Intelligent Portfolios