Schwab Intelligent Portfolios & Q4 2022 Market Performance¹

January 23, 2023
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How did financial markets do in Q4 2022?

The fourth quarter of 2022 brought a rally for both stocks and bonds, though markets remained volatile through year-end as an exceptionally challenging year came to a close. While the Federal Reserve and other global central banks played Grinch with additional rate hikes that appeared likely to continue into the new year, inflation showed signs of moderation that could potentially benefit markets in 2023.

Equity markets rallied across the board in Q4 as inflation eased further from its recent highs, though December brought renewed volatility as global central banks remained hawkish. International stocks led for the quarter with double-digit gains, aided by a softening U.S. dollar. U.S. stocks also delivered solid gains for the quarter, and fundamental index ETFs outperformed their market cap-weighted counterparts across all five major equity asset classes as value stocks continued to outpace growth stocks. While the turn positive in Q4 was welcome, it was not enough to overcome the significant declines earlier in the year. Stocks ended the year down double-digits in their weakest year since 2008.

Bonds also rallied in Q4 as longer-term interest rates eased from their recent highs. However, the yield curve further inverted, with short-term rates higher than long-term rates, indicating elevated recession risk. For the full year, bonds remained deeply negative, with the worst year on record for the Aggregate Bond Index, due to the Fed's aggressive pace of rate hikes. While negative returns for both stocks and bonds in 2022 presented an exceptionally challenging year for investors, defensive asset classes such as cash and gold played their role in helping to moderate overall portfolio declines. Cash was the top performing asset class, underscoring why it's an important part of a well-diversified portfolio.

As the year ended, overall economic growth remained solid, though corporate earnings softened considerably, and growth expectations for coming quarters saw significant cuts. The housing market slowed further as mortgage rates remained at their highest levels since 2008. On a brighter note, unemployment remained at historically low levels, and inflation appeared poised to continue to move lower in coming months, with prices for gasoline falling to their lowest level of the year.

Figure 1: Market performance (ranked by Q4 2022 total return)
Asset class Q4 2022 
[Index Total Returns (%)]
1 Year 
[Index Total Returns (%)]
3 Year Annualized 
[Index Total Returns (%)]
International large cap stocks 17.34 -14.45 0.87
International small cap stocks 15.79 -21.39 -0.93
Emerging markets stocks 9.70 -20.09 -2.69
Gold & other precious metals 8.49 0.44 6.19
U.S. large cap stocks 7.56 -18.11 7.66
U.S. small cap stocks 6.23 -20.44 3.10
Emerging markets bonds 5.89 -8.44 -1.73
U.S. real estate investment trusts (REITs) 5.27 -24.36 0.02
High-yield bonds 4.34 -11.88 -0.84
Municipal bonds 4.10 -8.53 -0.77
Investment-grade corporate bonds 3.44 -15.26 -2.86
Securitized bonds 2.05 -11.67 -3.07
Treasury Inflation Protected Securities (TIPS) 2.04 -11.85 1.21
U.S. Treasuries 1.28 -9.39 -1.79

How did Schwab Intelligent Portfolios do?

For Schwab Intelligent Portfolios, Q4 brought the strongest quarter in two years, though the pressure across both stocks and bonds in previous quarters resulted in negative returns for the year. Growth portfolios saw the strongest gains in Q4, but the biggest declines for the year due to their emphasis on stocks. Moderate portfolios saw strong gains in Q4 but sizable declines for the year due to their balanced mix of stocks and bonds. And Conservative portfolios saw solid gains in Q4, though they also saw sizable declines for the year due to the unprecedented pressure on bonds in 2022.

While returns for 2022 were negative across the risk spectrum during an exceptionally volatile year, diversification within Schwab Intelligent Portfolios, which includes fundamental index ETFs and defensive asset classes such as cash and gold, helped moderate overall portfolio declines.

Looking ahead to Q1 2023

As we move into 2023, it's important to look forward. While 2022 was an exceptionally challenging year, interest rates are now at higher levels, resulting in higher yields on bonds. And while the Fed appears poised for additional rate hikes, the pace has slowed and may slow further if inflation continues to ease as expected. While market volatility is likely to remain elevated due to the economic uncertainty, potentially lower inflation and a pause in rate hikes at some point could help support markets going forward.

These inevitable periods of market turbulence underscore the importance of focusing on what you can control, such as keeping costs low, and adhering to time-tested investment principles, such as those used by Schwab Intelligent Portfolios, of diversification, periodic rebalancing and sticking with your longer-term plan. These are among the keys to long-term investment success.

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.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

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.