Performance | Wednesday, October 13, 2021

Schwab Intelligent Portfolios & Q3 2021 Market Performance¹

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Key Points

  • U.S. stocks, as measured by the S&P 500® Index, reached a new high in Q3 before pulling back near quarter-end, while small cap stocks declined amid a wealth of uncertainties.

  • In international equity markets, developed market small cap stocks saw modest gains while emerging market stocks tumbled in response to China's regulatory crackdown.

  • Bonds came under pressure as interest rates moved higher in late-September, though some fixed income asset classes such as Treasury Inflation Protected Securities, or TIPS, delivered modest gains.

  • For Schwab Intelligent Portfolios, returns were relatively flat during Q3 amid muted returns across most asset classes.

How did financial markets do in Q3 2021?

Following Q2's optimistic outlook based on falling COVID-19 rates and accelerating economic reopening, Q3 turned out to bring a long, hot summer marked by a spike in new COVID-19 cases, concerns about inflation, massive wildfires and hurricanes, political debate over the debt ceiling and fiscal spending measures, along with a tumultuous withdrawal from Afghanistan after a 20-year occupation.

At the same time, the U.S. stock market, as represented by the S&P 500® Index, continued to climb that proverbial wall of worry for most of the quarter. The index reached a new high before running into turbulence in late September and just managing to eke out a modestly positive Q3 return. Amid the uncertainties, small cap stocks declined, and performance leadership shifted back toward more defensive large cap growth stocks and away from the cyclically oriented value stocks that had led in recent quarters. In international equity markets, developed market small cap stocks were modestly positive, while emerging markets tumbled in response to China's regulatory crackdown.

Bonds came under pressure as interest rates moved higher in late-September, though some fixed income asset classes such as Treasury Inflation Protected Securities (TIPS) delivered modestly positive gains. Inflation fears persisted but had moderated by quarter-end, though supply chain bottlenecks that have pushed prices up recently remained a concern. The Fed indicated it would likely begin reducing its asset purchases in coming months, though any potential rate hikes appeared to remain unlikely until 2022 or 2023. 

As Q3 came to a close, economic expectations remained solid as corporate earnings showed continued growth and COVID-19 rates began to decline from their summer peaks. New jobless claims reached a pandemic low during the quarter, though the overall unemployment rate remained elevated. At the same time, job openings remained high, stirring debate about a potential mismatch between jobs and workers and the implications for potential job growth in coming quarters.

Figure 1: Market performance (ranked by Q3 2021 total return)

  Index total returns (%)
Asset class Q3 2021 1-Year 3-Year (annualized)
Treasury Inflation Protected Securities (TIPS) 1.7 5.2 7.4
U.S. real estate investment trusts (REITs) 1.0 37.0 9.9
International small cap stocks 0.9 29.0 9.0
High-yield bonds 0.7 10.0 6.5
U.S. large cap stocks 0.6 30.0 16.0
Securitized bonds -0.1 -0.4 4.0
Investment-grade corporate bonds -0.1 1.4 7.1
U.S. Treasuries -0.1 -1.7 4.6
Municipal bonds -0.3 2.6 5.1
International large cap stocks -0.4 25.7 7.6
Emerging markets bonds -1.0 4.9 5.0
Gold & other precious metals -2.7 -8.1 12.2
U.S. small cap stocks -4.4 47.7 10.5
Emerging markets stocks -8.1 18.2 8.6

Source: Morningstar Direct, as of Sept. 30, 2021. Performance figures shown are total returns for each asset class during the designated period. Indexes used are: Treasury Inflation Protected Securities, Bloomberg TIPS Index; U.S. real estate investment trusts, S&P United States REIT Index; International developed market small cap stocks, MSCI EAFE Small Cap Index; High-yield bonds, Bloomberg High Yield Very Liquid Index; U.S. large cap stocks, S&P 500® Index; Securitized Bonds, Bloomberg Securitized Index; Investment-grade corporate bonds, Bloomberg U.S. Corporate Credit Index; U.S. Treasuries, Bloomberg U.S. Treasury 3-7 Year Bond Index; Municipal bonds, Bloomberg Municipal Index; International developed market large cap stocks, MSCI EAFE Index; Emerging markets bonds, Bloomberg Emerging Markets Local Currency Government Bond Index; Gold and other precious metals, S&P GSCI Precious Metals Index; U.S. small cap stocks, Russell 2000® Index; Emerging markets stocks, MSCI Emerging Markets Index. Past performance does not guarantee future results. Indexes are unmanaged and cannot be invested in directly.

How did Schwab Intelligent Portfolios do?

For Schwab Intelligent Portfolios, returns were relatively flat during the quarter. Conservative portfolios saw modest pressure from some fixed income asset classes but benefited from  TIPS and modest exposure to stocks. Growth portfolios benefited from U.S. large cap stocks and international developed market small cap stocks but were held back by U.S. small cap and emerging market stocks. And moderate portfolios held up due to their balanced mix of stocks and bonds.

Looking ahead to Q4 2021

Looking forward to the final quarter of the year, the renewed market volatility might remain elevated in coming quarters amid continued uncertainties and as the Fed begins to reduce its asset purchases and moves nearer to its first rate hike. Whether markets turn higher again or run into another bout of turbulence, remains to be seen. Either way, it is important to stay focused on your longer-term goals, rebalance periodically and ignore short-term market noise. These are among the time-test principles for long-term investment success.

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