Schwab Intelligent Portfolios & Q2 2022 Market Performance¹
Key Points
Market volatility increased in Q2, with the S&P 500® Index closing in bear market territory (20% decline from a previous high) for the first time in two years.
Fundamental index ETFs outperformed their market cap-weighted counterparts as market leadership shifted toward value-oriented companies and away from the large consumer technology growth stocks that had led the markets in recent years.
Bonds also saw declines during Q2 due to the continued headwind of rising interest rates; however, portfolios benefited from diversification as fixed income asset classes such as Treasuries and mortgage-backed securities held up better than the broad aggregate bond index.
Cash was the best performing asset class in Q2, highlighting why it's an important part of a diversified portfolio in helping provide ballast in turbulent times.
For Schwab Intelligent Portfolios, the pressure on both stocks and bonds resulted in negative returns in Q2, but diversification helped moderate overall portfolio declines.
How did financial markets do in Q2 2022?
The second quarter of 2022 brought continued market volatility amid an economy in transition. Elevated inflation, Federal Reserve interest rate hikes, slowing economic growth and ongoing geopolitical uncertainty with the war in Ukraine resulted in pressure on both stocks and bonds, presenting a particularly challenging period for investors.
Market volatility increased in Q2, with the S&P 500 Index closing in bear market territory for the first time in two years and seeing its worst first half of a year since 1970. After having led in performance for several years, U.S. stocks saw the biggest declines, with many of the high-flying consumer technology growth stocks among the bottom performers. Value-oriented stocks and international stocks held up better but still saw double-digit declines during the quarter. Fundamental ETFs included within Schwab Intelligent Portfolios for diversification benefited from the value tailwind and outperformed their market cap-weighted counterparts across all five major equity asset classes.
Bonds also saw declines during Q2 due to the continued headwind of rising interest rates. However, the benefit of diversification within Schwab Intelligent Portfolios was demonstrated as fixed income asset classes such as Treasuries and mortgage-backed securities held up better than the broad aggregate bond index. Cash was the top performer during the period, underscoring its role as a defensive asset class designed to provide ballast in turbulent times.
Figure 1: Market performance (ranked by Q2 2022 total return)
| Index total returns (%) | |||
|---|---|---|---|
| Asset class | Q2 2022 | 1-Year | 3-Year (annualized) |
| U.S. Treasuries | -2.0 | -7.8 | -0.5 |
| Municipal bonds | -2.9 | -8.6 | -0.2 |
| Securitized bonds | -3.9 | -9.0 | -1.3 |
| Treasury Inflation Protected Securities (TIPS) | -6.1 | -5.1 | 3.0 |
| Gold & other precious metals | -6.4 | 3.0 | 8.8 |
| Investment-grade corporate bonds | -6.9 | -13.6 | -1.0 |
| Emerging markets bonds | -7.0 | -9.6 | -0.8 |
| High-yield bonds | -10.5 | -13.6 | -0.6 |
| Emerging markets stocks | -11.4 | -25.3 | 0.6 |
| International large cap stocks | -14.5 | -17.8 | 1.1 |
| U.S. large cap stocks | -16.1 | -10.6 | 10.6 |
| U.S. real estate investment trusts (REITs) | -16.9 | -6.2 | 4.0 |
| U.S. small cap stocks | -17.2 | -25.2 | 4.2 |
| International small cap stocks | -17.7 | -24.0 | 1.1 |
Source: Morningstar Direct, as of June 30, 2022. Performance figures shown are total returns for each asset class during the designated period. Indexes used are: U.S. Treasuries, Bloomberg U.S. Treasury 3-7 Year Bond Index; Municipal bonds, Bloomberg Municipal Index; Securitized Bonds, Bloomberg Securitized Index; Treasury Inflation Protected Securities, Bloomberg TIPS Index; Gold and other precious metals, LBMA Gold Price PM; Investment-grade corporate bonds, Bloomberg U.S. Credit Index; Emerging markets bonds, Bloomberg Emerging Markets Local Currency Government Bond Index; High-yield bonds, Bloomberg High Yield Very Liquid Index; Emerging markets stocks, MSCI Emerging Markets Index; International developed market large cap stocks, MSCI EAFE Index; U.S. large cap stocks, S&P 500® Index; U.S. real estate investment trusts, S&P United States REIT Index; U.S. small cap stocks, Russell 2000® Index; International developed market small cap stocks, MSCI EAFE Small Cap 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, the pressure on both stocks and bonds resulted in negative returns in Q2. Conservative portfolios saw the smallest declines due to their emphasis on bonds, which held up better than stocks. Moderate portfolios saw larger declines due to their larger allocations to stocks. And Growth portfolios saw the biggest declines due to their emphasis on stocks.
While returns were negative across the risk spectrum during a volatile quarter, diversification within Schwab Intelligent Portfolios to include fundamental index ETFs and defensive asset classes such as Treasuries and cash helped moderate overall portfolio declines.
Looking ahead to Q3 2022
Moving into Q3, economic signals were mixed, with low unemployment and solid overall economic growth despite weak consumer confidence and signs of slowing in the housing market and other areas of the economy. With soaring prices for oil, gas, food and other goods, the Federal Reserve boosted interest rates during Q2 to help push down inflation, with a three-quarter percentage point increase in June that was its largest since 1994. While a potential recession remained uncertain, risk of a hard landing increased amid the tightening financial conditions.
While 2022 has been a challenging year so far for investors, it's important to remember that these periods of volatility occur from time to time. As we've seen in previous periods of turbulence, time-tested principles, such as those used by Schwab Intelligent Portfolios, of diversification, periodic rebalancing and staying the course rather than letting emotions drive financial decisions have proven historically to be among the keys to long-term financial success.
David Koenig CFA®, FRM®, is Vice President and Chief Investment Strategist for Schwab Intelligent Portfolios