Performance | Friday, July 10, 2020

Schwab Intelligent Portfolios & Q2 2020 Market Performance¹

Read Transcript Open new window

Key Points

  • Following its rapid tumble into a bear market in Q1, the U.S. stock market rebounded in Q2 in its strongest quarter since 1998. 

  • All asset classes included in Schwab Intelligent Portfolios delivered positive returns in Q2, led by investments such as small cap stocks that had seen the largest declines in Q1.

  • Bonds also performed well and are among the top performers YTD along with gold, due to their smaller declines in Q1 and solid gains in Q2.

  • The rapid shift between top performers and bottom performers from Q1 to Q2 illustrates the benefits of a diversified investment approach across asset classes to help moderate overall portfolio volatility.

  • As would be expected, more aggressive portfolios did best in Q2 after having seen the largest declines in Q1, while more conservative portfolios saw solid but smaller gains in Q2 along with smaller declines in Q1.

How did financial markets do in Q2 2020?

While amusement parks have been closed for several months due to the coronavirus pandemic, the financial markets have been on quite a roller-coaster ride. After having tumbled into the fastest-ever bear market in Q1, stocks rebounded with a tremendous surge in Q2. Small cap stocks jumped from the worst-performing asset class in Q1 to the top performer in Q2. Likewise, the S&P 500® Index of U.S. large cap stocks rose more than 20% in Q2 after a nearly 20% tumble in Q1, leaving it down just 3% YTD.

Economic indicators have been on the same roller-coaster ride. Unemployment claims spiked as businesses closed and economic growth expectations plunged, both to unprecedented levels. However, the policy response has been equally unprecedented, both in the U.S. and around the globe. A long list of lending facilities and other actions from the Federal Reserve along with trillions of dollars in emergency aid packages from Congress have helped support households and businesses, as well as the markets.

Bonds also performed well in Q2 after having come under pressure during Q1 along with stocks, due primarily to market liquidity strains. Quick action from the Fed helped ease those strains, supporting asset classes such as corporate bonds and municipal bonds. High-yield bonds and investment-grade corporates each rose 9% in Q2. Treasuries also gained, though they moved to the bottom of the performance rankings after having been at the top in Q1. For the first half of 2020, gold was the top performer with a gain of nearly 17% followed by Treasuries and other fixed income investments, while stocks remained in the red despite the strong Q2 gains.

Figure 1: Market Performance (ranked by Q2 2020 total return)

Index total returns (%)
Asset class Q2 2020 YTD 2020 3-Year (Annualized)
U.S. small cap stocks 25.4 -13.0 2.0
U.S. large cap stocks 20.5 -3.1 10.7
International small cap stocks 19.9 -13.1 0.5
Emerging markets stocks 18.1 -9.8 1.9
International large cap stocks 14.9 -11.3 0.8
U.S. real estate investment trusts (REITs) 11.7 -18.3 -0.1
Gold & other precious metals 9.9 16.7 12.5
High-yield bonds 9.0 -4.4 3.1
Investment-grade corporate bonds 9.0 5.0 6.3
Emerging markets bonds 4.5 -3.4 2.4
Treasury Inflation Protected Securities (TIPs) 4.2 6.0 5.0
Municipal bonds 2.7 2.1 4.2
Securitized bonds 0.9 3.6 4.0
U.S. Treasuries 0.7 7.0 4.7

Source: Morningstar Direct, as of June 30, 2020. Performance figures shown are total returns for each asset class during the designated period. Indexes used are: U.S. small cap stocks, Russell 2000® Index; U.S. large cap stocks, S&P 500® Index; International developed market small cap stocks, MSCI EAFE Small Cap Index; Emerging markets stocks, MSCI Emerging Markets Index; International developed market large cap stocks, MSCI EAFE Index; U.S. real estate investment trusts, S&P United States REIT Index; Gold and other precious metals, LBMA Gold Price; 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; Treasury Inflation Protected Securities, Bloomberg Barclays TIPS Index; Municipal bonds, Bloomberg Barclays Municipal Index; Securitized Bonds, Bloomberg Barclays Securitized Index; U.S. Treasuries, Bloomberg Barclays U.S. Treasury 3-7 Year Bond Index. Past performance does not guarantee future results. Indexes are unmanaged and cannot be invested in directly.

How did Schwab Intelligent Portfolios® do?

As with the markets, Schwab Intelligent Portfolios saw strong gains across the risk spectrum in Q2. For clients in conservative portfolios, bonds have played their role in helping moderate the ups and downs throughout the turbulence. While portfolios might have declined in Q1 as bonds came under pressure along with stocks, conservative portfolios held up far better than major stock indexes such as the S&P 500. By the end of Q2, conservative portfolios had recovered and were relatively flat for the year. And clients who stayed invested continued to receive interest and dividends despite the market gyrations.

Moderate portfolios saw larger ups and downs than conservative portfolios. However, a diversified mix of stocks and bonds still helped to moderate declines during the Q1 sell-off, while also benefiting from the strong stock rally in Q2 that erased most of the losses for these portfolios YTD.

Growth portfolios saw the strongest gains in Q2 due to their emphasis on stocks, though they also saw larger declines during Q1. Still, the Q2 rally erased a good portion of those losses YTD. More aggressive portfolios have higher long-term expected returns, but that of course comes with higher expected volatility. Learn more by reading "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 by reading "How to Determine Your Risk Tolerance Level ."

Working to help keep your portfolios aligned with your goals

Toward the end of Q2, we completed our annual asset allocation and ETF review. As part of our ongoing portfolio management, we review and potentially update portfolio allocations and ETFs each year. This might have resulted in a shift in your goal status or trades in your account in June to help make sure your portfolio stays aligned with our latest long-term risk and return expectations for each asset class.

Keep in mind that these trades are simply to reflect the updated long-term outlook and are not for short-term tactical market timing purposes. You can also find more information about this annual review and update on the website Learn more by reading "Why We Update Portfolio Allocations and ETFs Each Year."

Looking ahead to Q3 2020

Heading into Q3, we remain cautiously optimistic about the pace of the economic and market recovery. Economic indicators have shown signs of improvement, and most economists expect that growth will turn positive again in the second half of the year. However, the corporate earnings outlook remains cloudy and the number of new COVID-19 cases has risen as economies have reopened, resulting in some states slowing down the pace of reopening. While the market gains in Q2 are welcome, volatility is likely to remain elevated until greater clarity is gained on the pandemic.

The quick shifts among asset classes from bottom performers to top performers and vice versa during Q1 and Q2 illustrate the importance of diversification. As different asset classes constantly move up and down the rankings, investing in a diversified portfolio helps ensure that at any given time you're holding some of the top performers while not being overly concentrated in the bottom performers, helping to moderate overall volatility over time. And while the past two quarters have been extremely challenging, they serve as an important reminder that staying focused on your longer-term plan, disciplined rebalancing and not overreacting to short-term volatility are among the keys to long-term investment success.

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