Schwab Intelligent Portfolios & Q4 2020 Market Performance¹
Transcript of the video:
Global equities saw their third consecutive positive quarter, with U.S. large cap stocks ending the year at an all-time high and small cap stocks and international stocks moving back into positive territory for the year.
Market performance leadership also shifted from growth investments to value investments, providing a tailwind for fundamental indexing ETFs.
Fixed income asset classes saw mostly positive returns in Q4 and remained solid performers for the year due to strong performance during the Q1 market volatility.
More aggressive portfolios did best in Q4 as stocks outperformed bonds during the quarter, while all portfolios moved back into positive territory for the year.
How did financial markets do in Q4 2020?
Financial markets shifted to a more optimistic footing in the final quarter of a year filled with tremendous turbulence, not only for the markets and the economy but with a global pandemic, social strains and a contentious presidential election as well. It would be an understatement to say 2020 might rank among the most challenging years we've faced recently as a nation.
Positive developments on COVID-19 vaccines helped boost the U.S. stock market in its third-consecutive positive quarter. Notably, the S&P 500 Index of U.S. large cap stocks ended the year at an all-time high, and market participation broadened during the quarter to include performance leadership from segments such as small cap stocks and international stocks that had lagged during most of the rally. That broadening brought all the major stock market segments back into positive territory for the year.
Fixed income markets also saw mostly positive gains for the quarter and remained solid performers for the year due to their strong performance during the Q1 volatility. Gold was among the bottom performers during Q4 but remained the top-performing asset class for 2020.
Figure 1: Market performance (ranked by Q4 2020 total return)
|Index total returns (%)|
|Asset class||Q4 2020||2020||3-Year (annualized)|
|U.S. small cap stocks||31.4||20.0||10.2|
|Emerging markets stocks||19.7||18.3||6.2|
|International small cap stocks||17.3||12.3||4.8|
|International large cap stocks||16.0||7.8||4.3|
|U.S. large cap stocks||12.2||18.4||14.2|
|U.S. real estate investment trusts (REITs)||11.5||-7.5||3.4|
|Emerging markets bonds||7.1||5.3||3.7|
|Investment-grade corporate bonds||2.8||9.4||6.8|
|Treasury Inflation Protected Securities (TIPS)||1.6||11.0||5.9|
|Gold & other precious metals||0.1||24.6||13.5|
Source: Morningstar Direct, as of December 31, 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; Emerging markets stocks, MSCI Emerging Markets Index; International developed market small cap stocks, MSCI EAFE Small Cap Index; International developed market stocks, MSCI EAFE Index; 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 Barclays Emerging Markets Local Currency Government Bond Index; High-yield bonds, Bloomberg Barclays High Yield Very Liquid Index; Investment-grade corporate bonds, Bloomberg Barclays U.S. Corporate Credit Index; Municipal bonds, Bloomberg Barclays Municipal Index; Treasury Inflation Protected Securities, Bloomberg Barclays TIPS Index; Gold and other precious metals, LBMA Gold Price; 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.
Market shifts from "growth" toward "value"
Another notable market shift during Q4, was to performance leadership from value-oriented investments after a handful of growth-oriented, large consumer technology stocks had powered the early quarters of the recovery. That shift to leadership from more cyclical, value-oriented investments provided a tailwind for fundamental indexing ETFs, which mostly outperformed their market cap counterparts during the quarter. 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.
Economic growth moderates but remains positive
On the economic front, growth remained positive in Q4, though at a more moderate pace following the Q3 rebound from the deep hole earlier in the year. Unemployment continued to edge downward, though millions of workers remained jobless as business activity softened amid a resurgence in COVID infections and renewed business restrictions around the country.
Congress approved a new fiscal aid package in late December, with direct payments to workers and enhanced unemployment benefits. While the economic recovery appears to be on a positive trajectory, uncertainty remains over the speed of vaccine distribution and its potential effects on business activity, likely keeping market volatility elevated for some time.
How did Schwab Intelligent Portfolios do?
As with the markets, Schwab Intelligent Portfolios saw continued gains across the risk spectrum in Q4. Returns for the quarter increased incrementally from single digits for Conservative portfolios to double digits for Aggressive Growth portfolios as stocks significantly outperformed bonds during the quarter.
For the full year, all portfolios moved back into positive territory, with returns for 2020 relatively flat in mid-single digits across the risk spectrum. That's because Conservative portfolios were the strongest performers during the Q1 turbulence, while Aggressive Growth portfolios were the weakest performers in Q1 but the strongest performers in Q4. And Moderate portfolios saw moderate declines in Q1 along with moderate gains during the rally.
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 Q1 2021
We remain cautiously optimistic that the economic recovery appears sustainable. While uncertainties remain, a transition to a new administration and continued positive developments on COVID-19 vaccinations would be expected to help ease market volatility as the year proceeds. The broadening market participation during the quarter to segments that had lagged during most of the rally is encouraging, though the sharp rebound from the March lows has boosted market valuations and potential pullbacks in coming quarters remain a risk.
All of the ups and downs of 2020 underscore why it's so important to invest in a diversified portfolio with not only the return potential needed to help you achieve your financial goals, but also with a level of potential volatility that you can stomach when markets turn volatile. This is designed to help make sure you can stay the course through these inevitable rocky periods.
David Koenig CFA®, FRM®, is Vice President and Chief Investment Strategist for Schwab Intelligent Portfolios