Performance | Monday, January 10, 2022

Schwab Intelligent Portfolios & Q4 2021 Market Performance¹

Read Transcript Open new window

Key Points

  • U.S. stocks, as measured by the S&P 500® Index, saw one of their strongest years over the past decade as financial markets overcame concerns about COVID-19 and rising inflation.

  • In international equity markets, developed market stocks posted solid gains for the year, while emerging market stocks were modestly negative due primarily to China’s regulatory crackdown.

  • Within fixed income, diversification paid off as asset classes such as Treasury Inflation Protected Securities (TIPS) delivered positive returns despite rising interest rates.

  • Schwab Intelligent Portfolios® saw strong returns in 2021, with more aggressive portfolios delivering the strongest returns as equity markets posted robust gains.

How did financial markets do in Q4 2021?

The final quarter of 2021 brought a more optimistic outlook following the third-quarter’s concerns about COVID-19 and rising inflation. Despite news of a new Omicron variant and another wave of infections, COVID-19 cases remained less severe overall than last winter as vaccination rates continued to climb. Inflation concerns persisted but moderated as supply chain bottlenecks eased and inventories grew, and Congress passed a government funding bill relatively easily, avoiding a potential year-end shutdown.

Adding to one of its strongest years over the past decade, the U.S. stock market, as represented by the S&P 500 Index, saw robust returns in Q4. Small cap stocks also posted solid returns for the quarter and the year despite falling briefly into correction territory in late November amid the initial uncertainties over the Omicron variant. International developed market stocks were also positive, while emerging markets were modestly negative due primarily to China’s regulatory crackdown. 

U.S. REITs were the top performing asset class within Schwab Intelligent Portfolios in 2021, playing its role in helping protect against rising inflation. Fundamental indexing ETFs were also among the top performers, benefiting from a market shift over much of the year toward value-oriented investments following several years in which growth had led in performance.

Within fixed income, the benefit of diversification within Schwab Intelligent Portfolios was demonstrated in the rising interest rate environment of 2021. Asset classes such as TIPS and high-yield bonds delivered positive returns even as core bonds such as Treasuries were down modestly for the year.

Figure 1: Market performance (ranked by Q4 2021 total return)

  Index total returns (%)
Asset class Q4 2021 1-Year 3-Year (annualized)
U.S. real estate investment trusts (REITs) 16.4 43.0 18.1
U.S. large cap stocks 11.0 28.7 26.1
Gold & other precious metals 4.1 -5.1 11.1
International large cap stocks 2.7 11.3 13.5
Treasury Inflation Protected Securities (TIPS) 2.4 6.0 8.4
U.S. small cap stocks 2.1 14.8 20.0
Municipal bonds 0.7 1.5 4.7
High-yield bonds 0.7 4.5 8.4
Emerging markets bonds 0.4 -1.6 4.3
Investment-grade corporate bonds 0.2 -1.1 7.2
International small cap stocks 0.1 10.1 15.6
Securitized bonds -0.4 -1.0 3.2
U.S. Treasuries -0.8 -2.3 3.4
Emerging markets stocks -1.3 -2.5 10.9

Source: Morningstar Direct, as of Dec. 31, 2021. Performance figures shown are total returns for each asset class during the designated period. Indexes used are: U.S. real estate investment trusts, S&P United States REIT Index; U.S. large cap stocks, S&P 500® Index; Gold and other precious metals, S&P GSCI Precious Metals Index; International developed market large cap stocks, MSCI EAFE Index; Treasury Inflation Protected Securities, Bloomberg TIPS Index; U.S. small cap stocks, Russell 2000® Index; Municipal bonds, Bloomberg Municipal Index; High-yield bonds, Bloomberg High Yield Very Liquid Index; Emerging markets bonds, Bloomberg Emerging Markets Local Currency Government Bond Index; Investment-grade corporate bonds, Bloomberg U.S. Corporate Credit Index; International developed market small cap stocks, MSCI EAFE Small Cap Index; Securitized Bonds, Bloomberg Securitized Index; U.S. Treasuries, Bloomberg U.S. Treasury 3-7 Year Bond 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, Growth portfolios saw the strongest returns for Q4 and the year as equity markets moved steadily higher. Moderate portfolios benefited from their balanced mix of stocks and bonds. And Conservative portfolios benefited from modest exposure to stocks and from asset classes such as TIPS within fixed income. 

Looking ahead to Q1 2022

Moving into the first quarter of 2022, corporate earnings and overall growth have remained solid as the economy moved from recovery to expansion. Unemployment continues to decline and labor force participation reached its highest level since the onset of the pandemic amid robust wage growth. With an eye on inflation and strengthening economic data, the Fed began tapering its asset purchases during the quarter, and expectations for the timing of a potential rate hike moved up to mid-2022.

While 2021 saw few periods of market turbulence, it’s important to remember that financial markets are volatile by nature and the coming quarters might bring a few more ups and downs. As always, staying focused on your longer-term goals and ignoring potential short-term market noise are among the time-tested keys to long-term financial success.

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