Schwab Intelligent Portfolios July 3, 2019

    Key Themes

    • Following the exceptionally strong rally in Q1, U.S. stock market returns moderated in Q2 as volatility returned amid concerns about trade and other geopolitical issues.
    • The benefits of maintaining a disciplined, diversified investment approach based on your goals and risk profile have been highlighted in recent quarters as markets have shifted back and forth between sharp sell-offs and strong rallies.
    • Despite numerous headwinds, portfolios across the risk spectrum delivered positive returns for Q2 and the first half of 2019.

    How did financial markets do in Q2 2019?

    The second quarter of 2019 brought a series of moderate ups and downs for the U.S. stock market following the sharp decline in Q4 2018 and rapid recovery in Q1 2019. Concerns about trade, Federal Reserve (Fed) policy, and other geopolitical issues kept investors on edge, resulting in quick market swings in both directions based on shifting headlines. Despite the uncertainties, stocks rallied to new highs near the end the quarter as U.S. economic growth remained solid and the Fed appeared poised for a potential rate cut in coming months.

    Among top-performing asset classes during the quarter, interest-rate sensitive investments such as gold and bonds benefited from declining longer-term interest rates, while gold also benefited from its safe-haven status amid the abundance of geopolitical crosscurrents. U.S. stocks bounced back from a pullback in May to end the quarter with a solid gain and the strongest first half since 1997. By contrast, emerging markets were held back by strained trade talks with China and weakness in commodities as crude oil prices slid. For the first half of 2019 and over the longer-term 3-year period, all asset classes included in Schwab Intelligent Portfolios delivered positive returns despite the short-term fluctuations.

    Keep in mind that all of the investments in your portfolio are working together to produce the portfolio's overall risk and return characteristics. So avoid the temptation of looking at any one asset class in isolation. In some periods, an asset class such as U.S. large cap stocks might be performing best while another asset class such as emerging markets might be at the bottom of the list. In other periods, the asset classes at the top and bottom of the rankings might be reversed. Investing in a diversified portfolio across multiple asset classes is designed to smooth return patterns over time to help keep you focused on your longer-term goals. Learn more about How Schwab Intelligent Portfolios Invests.

    Figure 1: Market Performance (Ranked by Q2 2019 total return)
    Index Total Returns (%)
    Asset class Q2 2019 YTD 2019 3-Year
    Gold & other precious metals 8.8 10.2 2.5
    Investment-grade corporate bonds 4.5 9.8 4.0
    U.S. large cap stocks 4.3 18.5 15.4
    International large cap stocks 3.7 14.0 10.6
    Emerging markets bonds 3.4 5.8 4.3
    U.S. Treasuries 2.8 4.6 1.4
    High-yield bonds 2.6 10.8 7.7
    U.S. small cap stocks 2.1 17.0 13.8
    U.S. real estate investment trusts (REITs) 0.8 16.7 4.7
    Emerging markets stocks 0.6 10.6 12.0

    Source: Morningstar Direct, as of June 30, 2019. 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; Investment-grade corporate bonds, Bloomberg Barclays U.S. Corporate Investment Grade Index; U.S. large cap stocks, S&P 500® Index; International developed market large cap stocks, MSCI EAFE Index; Emerging markets bonds, Bloomberg Barclays Emerging Markets Local Currency Government Bond Index; U.S. Treasuries, Bloomberg Barclays U.S. Treasury 3-7 Year Bond Index; High-yield bonds, Bloomberg Barclays High Yield Very Liquid Index; U.S. small cap stocks, Russell 2000® Index; U.S. real estate investment trusts, S&P United States REIT Index; Emerging markets stocks, MSCI Emerging Markets Index Past performance does not guarantee future results. Indexes are unmanaged and cannot be invested in directly.

    Fed signals potential rate cut in coming months

    Longer-term interest rates fell sharply during the quarter as markets anticipated that the Fed would cut rates during the second half of 2019. While the Fed held rates steady at its June meeting, it signaled that it was poised for potential cuts in coming months amid low inflation and concerns about trade and global growth. Declining longer-term rates helped deliver strong returns across fixed-income asset classes.

    How did Schwab Intelligent Portfolios do?

    During Q2, all portfolios across the risk spectrum delivered positive returns. For much of the quarter, more conservative portfolios were the best performers amid the stock market volatility. However, the U.S. stock market rally near the end of the quarter resulted in relatively comparable returns across the risk spectrum as both stocks and bonds delivered moderate returns for the quarter. Over the longer-term, more aggressive portfolios have delivered higher long-term returns but those gains have come with greater fluctuation in returns, both to the upside and downside. By contrast, more conservative portfolios have delivered more moderate gains but with greater stability. Learn more about Keeping Track of Your Portfolio's Performance.

    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. Learn more about How to Determine Your Risk Tolerance Level.

    Looking ahead to Q3 2019

    Moving into the third quarter, the U.S. economy remains on solid footing. While the momentum in growth has slowed, there has been a modest pickup from earlier this year. U.S. corporate earnings have continued to grow despite tariff uncertainties and the waning tailwind of 2017's tax cuts. The labor market and consumer confidence have remained strong, and lower interest rates have provided a boost to the housing market after a drop in activity late last year.

    Schwab's view remains constructive but cautious amid Mideast tensions and other geopolitical risks. Trade frictions continue to be a risk to global growth, but global central banks have taken action to help provide stability. Equity market valuations remain near historical averages in the U.S. and below long-term averages in international markets. While markets are likely to remain volatile, a recession does not appear to be looming on the near-term horizon. 

    Amid the uncertainties, it's important to stay focused on what you can control rather than over-reacting to short-term market fluctuations and letting emotions drive decision-making. Taking a disciplined approach based on time-tested investing principles such as keeping costs low, investing in a diversified portfolio, rebalancing and ignoring short-term market noise are among the keys to long-term investment success.

    How Schwab Intelligent Portfolios Can Help

    With up to 20 asset classes in any single portfolio, and automated rebalancing, tax-loss harvesting and goal tracking, Schwab Intelligent Portfolios is designed to recommend a diversified portfolio consistent with your risk profile and manage your portfolio with discipline to help keep you on track toward reaching your financial goals.

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

    1. This quarterly commentary is designed to provide you with insight into the market environment during the quarter. How your portfolio performed is dependent upon your asset allocation across the risk spectrum from conservative to aggressive, as well as criteria such as when you opened your account, the timing of any deposits/withdrawals, timing of portfolio rebalances, whether you are enrolled in tax-loss harvesting and other criteria.

    Please read the Schwab Intelligent Portfolios Solutions™ disclosure brochures for important information, pricing, and disclosures related to the Schwab Intelligent Portfolios and Schwab Intelligent Portfolios Premium programs.

    Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ are made available through Charles Schwab & Co. Inc. ("Schwab"), a dually registered investment advisor and broker dealer.

    Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ are designed to monitor portfolios on a daily basis and will also automatically rebalance as needed to keep the portfolio consistent with the client's selected risk profile. Trading may not take place daily.

    Diversification, automatic investing and rebalancing strategies do not ensure a profit and do not protect against losses.

    Tax‐loss harvesting is available for clients with invested assets of $50,000 or more in their account. Clients must choose to activate this feature.


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