Schwab Intelligent Portfolios April 5, 2019

    Key Themes

    • The U.S. stock market rebounded sharply during Q1 in its strongest quarter since 2009 on a more dovish Fed and signals the U.S. economy remains on solid ground despite slowing growth. 
    • The benefit of maintaining a diversified portfolio and staying focused on longer-term goals as markets fluctuate was underscored as asset classes that were among the bottom performers in Q4 shifted rapidly to top performers in Q1.
    • Portfolios across the risk spectrum delivered positive returns, with the most aggressive portfolios showing the strongest returns as would be expected in a period of strong equity market performance.

    How did financial markets do in Q1 2019?

    The first quarter of 2019 saw a sharp rebound in the U.S. stock market in its strongest single quarter since 2009. Returns were broad-based, with all asset classes included in Schwab Intelligent Portfolios delivering positive returns. Financial conditions eased during the quarter amid signs the U.S. economy remains on solid ground, with a strong labor market and tame inflation, despite signs that economic growth is slowing. Financial markets were also supported by a more dovish Federal Reserve and lower expectations for additional rate increases in 2019.

    The sharp rebound in Q1 underscores the importance of maintaining a diversified portfolio as markets fluctuate. As the table below shows, asset classes that ranked among the bottom performers in Q4 shifted rapidly to top performers in Q1. Taking a longer-term view, all investments in the table delivered positive returns over the 3-year period despite the short-term fluctuations. Different investments constantly move up and down the performance rankings, illustrating why taking a disciplined approach based on your longer-term goals, rebalancing your portfolio as needed, and not overreacting emotionally to short-term market noise are among the keys to long-term investment success.

    Figure 1: Market Performance (Ranked by Q1 2019 total return)
    Index Cumulative Total Returns (%)
    Asset class Q1 2019 Q4 2018 3-Year
    U.S. real estate investment trusts (REITs) 15.8 -6.1 19.0
    U.S. small cap stocks 14.6 -20.2 44.7
    U.S. large cap stocks 13.6 -13.5 46.6
    International large cap stocks 10.0 -12.5 25.2
    Emerging markets stocks 9.9 -7.5 39.3
    High-yield bonds 8.1 -4.7 27.6
    Investment-grade corporate bonds 5.1 -0.2 11.6
    Emerging markets bonds 2.4 2.5 12.6
    U.S. Treasuries 1.8 2.7 3.4
    Gold & other precious metals 0.6 7.0 1.5

    Source: Morningstar Direct, as of March 31, 2019. 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. small cap stocks, Russell 2000® 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; High-yield bonds, Bloomberg Barclays High Yield Very Liquid 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; U.S. Treasuries, Bloomberg Barclays U.S. Treasury 3-7 Year Bond Index; Gold and other precious metals, S&P GSCI Precious Metals Index. Past performance does not guarantee future results. Indexes are unmanaged and cannot be invested in directly.

    Bonds and an inverted yield curve

    Longer-term interest rates declined during the quarter, which helped fixed-income investments deliver solid returns during the quarter. However, it also resulted in a phenomenon known as an inverted yield curve, with short-term interest rates slightly higher than long-term rates. While that inversion led to questions during the quarter about the potential timing of the next recession, yield curve inversions have historically been unreliable timing tools. Inversions have sometimes occurred without leading to a recession, and when they did precede a recession, the lag time was often a year or more. By the end of the quarter, long-term rates had moved back above short-term rates, though the yield curve remained relatively flat.

    How did Schwab Intelligent Portfolios do?

    During Q1, all portfolios across the risk spectrum delivered positive returns. The most aggressive portfolios were the strongest performers during the quarter, as would be expected during a period of strong equity market performance. By contrast, during the Q4 volatility, the most conservative portfolios were the strongest performers, as would be expected during a volatile period when equity markets declined. Over the longer-term, more aggressive portfolios have higher long-term return expectations but also higher volatility, or greater fluctuation in returns, both to the upside and downside.

    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 Q2 2019

    Moving into the second quarter, the U.S. economy has shown signs of slowing but remains on solid footing with a strong labor market and tame inflation. Despite the strong Q1 rally, equity market valuations have come down a bit and remain near historical averages in the U.S. and below long-term averages in international markets. While the durability of global growth remains a concern, central bank actions around the world to help ease financial conditions may be helping. Market expectations for interest rate hikes have come down and now lean toward a rate cut in the next couple of years as the Federal Reserve has indicated it believes current monetary policy is close to neutral. 

    Overall, Schwab's outlook is cautious but watchful. Recession risk has increased, but the next economic contraction does not appear to be looming on the near-term horizon. Market volatility is likely to remain elevated amid continued uncertainties over the strength of global growth, corporate earnings, and trade negotiations. In these uncertain times, it's important to focus on what you can control as markets fluctuate. 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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