SIP_Market_Commentary_Q1_2023_0423-31R2
How did financial markets do in Q1 2023?
The first quarter of 2023 began with a strong rally but ended with renewed volatility. Near quarter-end, the Federal Reserve raised rates another quarter point despite stress in the banking sector spurred by its rapid rate hikes in 2022. While continuing its inflation fight, the Fed also tried to ease bank jitters by stating that "the U.S. banking system is sound and resilient."
Despite the late-quarter turbulence, the U.S. stock market, as measured by the S&P 500 Index, delivered a strong gain for the second consecutive quarter as large consumer technology stocks rallied. International developed market large cap stocks also saw strong gains for the quarter. While riskier equity asset classes, such as small cap stocks, were relatively flat as investor risk appetite moderated amid growing recession fears.
Bonds also delivered solid gains as longer-term interest rates eased and the Fed slowed its pace of rate hikes. Core bonds such as Treasuries, mortgage-backed securities and corporate bonds were among the strong performers. Cash also delivered solid gains as it did throughout 2022, and gold was the top performer amid the economic uncertainty.
On the economic front, overall growth remained positive, although corporate earnings expectations continued to soften. Inflation remained stubborn but continued to ease from its 2022 highs. And unemployment remained at historical lows.
Figure 1: Market performance (ranked by Q1 2023 total return)
| Asset class |
Q1 2023 [Index Total Returns (%)] |
1 Year [Index Total Returns (%)] |
3 Year Annualized [Index Total Returns (%)] |
|---|---|---|---|
| Gold & other precious metals | 9.15 | 1.93 | 7.16 |
| International large cap stocks | 8.47 | -1.38 | 12.99 |
| U.S. large cap stocks | 7.50 | -7.73 | 18.60 |
| International small cap stocks | 4.92 | -9.83 | 12.07 |
| Emerging markets stocks | 3.96 | -10.70 | 7.83 |
| High-yield bonds | 3.80 | -3.89 | 4.90 |
| Investment-grade corporate bonds | 3.45 | -5.31 | -0.70 |
| Treasury Inflation Protected Securities (TIPS) | 3.34 | -6.06 | 1.75 |
| Emerging markets bonds | 3.11 | -3.54 | 1.92 |
| Municipal bonds | 2.78 | 0.26 | 0.35 |
| U.S. small cap stocks | 2.74 | -11.61 | 17.51 |
| U.S. real estate investment trusts (REITs) | 2.72 | -19.08 | 12.03 |
| U.S. Treasuries | 2.57 | -2.08 | -2.93 |
| Securitized bonds | 2.47 | -4.73 | -3.13 |
How did Schwab Intelligent Portfolios do?
For Schwab Intelligent Portfolios, Q1 brought a second-consecutive quarter of positive returns. Growth portfolios saw strong gains and were the top performers as stocks delivered solid returns for the quarter despite the volatility. Moderate portfolios saw moderate gains due to their balanced mix of stocks and bonds. And Conservative portfolios also saw solid gains as bonds moved higher.
Looking ahead to Q2 2023
Looking ahead to Q2, market volatility is likely to remain elevated amid the economic uncertainty. While recession risk is heightened, government action has helped to ease the stresses in the financial system. It remains to be seen whether additional unraveling occurs or whether the Fed is able to thread the needle between concerns about the financial system and current inflation. Despite the uncertainty, it's important to remain focused on your longer-term goals and time-tested investment principles, such as those followed by Schwab Intelligent Portfolios, of investing in a diversified portfolio, rebalancing as markets fluctuate and keeping costs low.
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.