Performance | Wednesday, April 8, 2020

Schwab Intelligent Portfolios & Q1 2020 Market Performance¹

Read Transcript Open new window

Key Points

  • The 11-year bull market ended suddenly in Q1 as U.S. stocks tumbled into bear market territory amid fears over the coronavirus pandemic and expectations of a global recession.

  • A rush to cash resulted in declines across several asset classes; however, diversification helped to moderate overall portfolio volatility.

  • Amid the market sell-off, more conservative portfolios saw smaller declines than more aggressive portfolios, as would be expected; however, even moderately conservative portfolios declined due to the pressures on fixed income investments.

How did financial markets do in Q1 2020?

The 11-year bull market came to a quick end soon after stocks entered into bear market territory. Volatility spiked to extreme levels, and declines were rapid and severe due to the combination of a public health crisis over the coronavirus pandemic and concerns about the economic effects as businesses closed and unemployment claims spiked.

The S&P 500® Index of U.S. large company stocks saw its largest single-day declines since 1987, both in March, and an overall drawdown of about 35% from its Feb. 19 peak; small company stocks and international equity declines were even more severe. Those declines were followed by the strongest three-day rebound since the 1930s, though major stock indexes remained in the red and volatile as the quarter came to a close.

Fixed income investments also came under pressure due to liquidity strains. However, action by the Federal Reserve (Fed) to cut interest rates to near zero and enact multiple stimulus measures helped ease the market strains. Defensive investments such as cash, Treasuries and gold helped moderate overall portfolio declines amid the stock sell-off.

Figure 1: Market performance (ranked by Q1 2020 total return)

  Index total returns
Asset class Q1 2020 2019 3-Year
Gold & other precious metals 6.2 18.4 8.9
U.S. Treasuries 6.2 5.9 4.7
Securitized bonds 2.6 6.4 4.0
Treasury Inflation Protected Securities (TIPS) 1.7 8.4 3.5
Municipal bonds -0.6 7.5 4.0
Investment-grade corporate bonds -3.6 14.5 4.2
Emerging markets bonds -7.6 9.5 1.5
High-yield bonds -12.3 15.3 0.9
U.S. large cap stocks -19.6 31.5 5.1
International large cap stocks -22.8 22.0 -1.8
Emerging markets stocks -23.6 18.4 -1.6
U.S. real estate investment trusts (REITs) -26.9 24.4 -3.2
International small cap stocks -27.5 25.0 -2.9
U.S. small cap stocks -30.6 25.5 -4.6

Source: Morningstar Direct, as of March 31, 2020. 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; U.S. Treasuries, Bloomberg Barclays U.S. Treasury 3-7 Year Bond Index; Securitized Bonds, Bloomberg Barclays Securitized Index; Treasury Inflation Protected Securities, Bloomberg Barclays TIPS Index; Municipal bonds, Bloomberg Barclays Municipal 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; High-yield bonds, Bloomberg Barclays High Yield Very Liquid Index; U.S. large cap stocks, S&P 500® Index; International developed market large cap stocks, MSCI EAFE Index; Emerging markets stocks, MSCI Emerging Markets Index; U.S. real estate investment trusts, S&P United States REIT Index; International developed market small cap stocks, MSCI EAFE Small Cap Index; U.S. small cap stocks, Russell 2000® Index. Past performance does not guarantee future results. Indexes are unmanaged and cannot be invested in directly.

How did Schwab Intelligent Portfolios® do?

During Q1, conservative portfolios saw smaller declines than more aggressive portfolios, as would be expected due to smaller allocations to volatile stocks. Diversification helped moderate portfolio drawdowns relative to the declines among the more volatile stock asset classes. However, even moderately conservative portfolios saw declines due to the pressures on fixed income investments. Over the longer-term, more aggressive growth portfolios have delivered higher long-term returns, but, as would be expected, those gains have come with greater fluctuation, both to the upside and downside. By contrast, more conservative portfolios have delivered more moderate longer-term gains but with greater stability.

Working to help keep your portfolios aligned with your goals

Through the turbulence, we've been busy managing your portfolios to keep them aligned with your goals. As part of that ongoing portfolio management, Schwab Intelligent Portfolios are monitored daily and rebalanced as needed. That's designed to help keep your allocation consistent with your goals and risk profile over time as markets fluctuate, rather than to shift your allocation to try to time markets. So the trades you're seeing in your accounts aren't to move completely in or out of various investments, but rather to add to investments that have become too little of your portfolio as prices declined, or to trim those that have become more of your portfolio than intended.

Another feature that has led to a great deal of trading is tax-loss harvesting, a powerful tool that may help reduce your current tax liabilities and leave you more to invest over time, which is available for taxable portfolios of at least $50,000.This feature can help take advantage of the turbulence by selling ETFs that have fallen below the price you paid for them to capture the loss. Proceeds from the sale are simultaneously reinvested into an alternate ETF in the same asset class that we've preselected. This way, you remain invested and positioned to benefit when markets recover. Tax-loss harvesting is a powerful process that can help to potentially reduce current tax liabilities for taxable accounts and leave you with more to invest over time.

Looking ahead to Q2 2020

Heading into Q2, the unprecedented monetary stimulus from the Fed has helped ease some of the market pressures, along with several fiscal stimulus measures passed by Congress, including a more than $2 trillion emergency aid package to help businesses and households. All of this stimulus should help markets and the economy, though it will take some time. The economy appears to have fallen into a recession, and a deep decline in GDP is expected for Q2. Though, at this point, most economic forecasts still expect growth to pick back up in the second half of the year.

Markets are likely to remain choppy in the near term until greater clarity is gained on when new coronavirus cases will peak and how severe the economic shock will be. History shows that it can take time to establish a bottom in a bear market, and sizable up and down moves might continue. Amid the elevated uncertainty, it's important to take a step back to avoid letting emotion control investment decisions. Time-tested investment principles of investing in a diversified portfolio, disciplined rebalancing and ignoring short-term market noise is designed to help navigate through these challenging periods and stay focused on your longer-term goals.

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