Schwab Intelligent Portfolios & Q4 2023 Market Performance¹

January 31, 2024
The fourth quarter of 2023 saw positive returns in every asset category, with all Intelligent Portfolio models having positive returns for the year.
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How Did Financial Markets Do?

The fourth quarter of 2023 saw positive returns in every asset category, but perhaps most notable was the nearly 12% fourth quarter return in U.S. large cap stocks that allowed the 2023 return to recover the losses experienced in 2022. Waning inflation, solid company earnings, decreasing fears of a recession, and an expectation that the U.S. Federal Reserve is finished raising rates and could begin cutting them this year buoyed investors.

Equity markets rallied across the globe, with U.S. stocks outshining international developed stocks in the quarter and for the full year. Leading the way in the quarter were U.S. small cap stocks, which saw a greater than 14% return that was only eclipsed by the over 17% return that REITs (real estate investment trusts) enjoyed. 2023 also saw strong performance from Fundamental Indexing in U.S. small cap and international large cap equities.

The bond market saw strong returns in the fourth quarter as interest rates broadly fell, but in many cases, the returns were just enough to push several categories into positive territory for the year. After a very difficult 2022 in the bond market, the expected recovery rally largely failed to materialize. Cash yields were also a great story for the quarter and the year, and once again highlighted the importance of the highly diversified approach to income investing in the Schwab Intelligent Portfolios.

Falling energy prices and interest rates in the quarter likely reinforced the Fed's decision to sit tight at their last three meetings. One market that remains elevated is the housing market, despite 30-year fixed mortgage rates rising to their highest levels in over 20 years, from below 3% two years ago to 8% in October, though they have since fallen to below 7%. The housing and rental markets have retreated somewhat, but housing affordability remains a challenge with monthly mortgage payments rising 50% and more due to higher mortgage rates.

Figure 1: Market performance (ranked by Q4 2023 total return)

Asset class Q4 2023 [Index Total Returns (%)] 1-Year [Index Total Returns (%)] 3-Year (annualized) [Index Total Returns (%)]
High-yield bonds 7.10 12.74 1.43
U.S. treasuries 4.93 4.29 -3.17
Emerging markets bonds 8.89 9.78 -4.44
Gold & other precious metals 10.19 13.52 2.68
Treasury Inflation-Protected Securities (TIPS) 4.54 3.87 -1.10
Emerging markets stocks 6.20 7.96 -3.87
Investment-grade corporate bonds 8.32 8.84 -2.78
U.S. large cap stocks 11.95 26.86 9.03
International small cap stocks 11.07 14.69 0.14
Securitized bonds 7.32 5.02 -2.87
Municipal bonds 7.25 6.16 -0.37
International large cap stocks 10.74 18.28 3.91
U.S. small cap stocks 14.69 18.54 3.43
U.S. real estate investment trusts (REITs) 17.97 11.28 5.60

How did Schwab Intelligent Portfolios do?

2023 stands in sharp contrast to 2022, with all Intelligent Portfolio models proving positive returns. Growth models with higher allocations to the stock market saw strong, double-digit returns for the year, and high single-digit returns for the fourth quarter. More conservative, income-focused models saw more muted positive returns that reflected the modest recovery in the bond market.

Looking ahead to Q4 2023

As we enter 2024, all eyes remain on the Fed; most market watchers have approved of their stewardship over the past several years, largely because thus far they have kept the U.S. out of recession. Geopolitics and the domestic politics associated with a presidential election year also promise to keep market participants on their toes. Schwab Intelligent Portfolios are designed to help our clients navigate uncertain times and achieve their investment objectives. We believe that broad diversification, low costs, and periodic rebalancing are key features of a successful long-term investment plan.