The global stock and bond markets went back into recession fear mode after a great 2019. Some of this was fear of the currently spreading coronavirus. As our portfolios are fairly well positioned for an environment where investors expect an economic slowdown, we beat all the benchmarks in January. This lower risk position also explains our relative underperformance last year.

Our Conservative portfolio gained 1.75%. Our Aggressive portfolio gained 0.49%. Benchmark Vanguard fund performances in January 2020 were as follows: Vanguard 500 Index Fund (VFINX), down 0.04%; Vanguard Total Bond Market Index Fund (VBMFX), up 2.11%; Vanguard Developed Markets Index Fund (VTMGX), down 2.76%; Vanguard Emerging Markets Stock Index (VEIEX), down 5.05%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 0.18%.

In general, global health scares are not a huge market event, but past contagions occurred when the stock market was less expensive, so the past may not be a good indication of the future. A more relevant factor is that China used to constitute a relatively small part of the global economy, and that is no longer the case. When the SARS coronavirus broke out in 2002, China had a 4% share of global GDP. Today, it is around 16%. Factor in the drag of the trade war, and really, anything can happen.

Oil reversed sharply during this rough month, pushing up our inverse fund PowerShares DB Crude Oil Dble Short (DTO) by 28%. Not including our short funds, our best performer was Vanguard Utilities (VPU) which delivered a particularly strong 6.77% return as interest rates were sliding and money was shifted to safer investments benefiting higher yield and generally safer utility stocks. Everything else on the stock side was either up slightly or down. International markets were particularly weak, with losses in the 3—6% range, notably in emerging markets with China exposure. Our own iShares MSCI BRIC Index (BKF) was our worst performer: down 5.19%. Oil wasn't the only weak commodity; all commodities were down, which sort of makes sense, as China is the biggest consumer of many commodities.

Bonds did well, notably the longer-term investment grade bonds we own, that tend to be where investors go in a panic. We're still worried that this party is almost over, but there could be one good move up (rates down) if and when we fall into our next recession. At the top of the list was Vanguard Extended Duration Treasury (EDV), up 10.32% for the month. Long-term government bonds were the number one fund category last month, followed by utilities, followed by long-term bonds. This largely explains our relatively good returns in January compared to the benchmarks.

In the last couple of days this scare seems to be leaving the markets faster than it appeared. This is because there is so much money in the system. Speaking of...what really got the reversal going in stocks was not news that China found a virus cure, but found a cure for the market — they basically lowered rates and injected over a hundred billion into the economy. It's the solution for all that ails you.

The more surprising event of recent days that didn't get much attention was Tesla stock doing a 1990s and going parabolic, as all the funds shorting the stock had to get out of the way . This took Tesla to a higher market cap than any other auto company in the world except Toyota, and Tesla almost passed Toyota's roughly $200 billion dollar market value to become #1 before plunging 17% in a day. For the record, Toyota has over 10 times the revenue of Tesla. This sort of exuberance by stock investors is more of a worry than the coronavirus.

This year is turning out to do much more for stocks than merely reversing the sharp declines of late 2018. The risk is that if corporate earnings don't continue growing at a reasonably fast pace to meet the increasingly high expectations of stock prices, the drop in the next recession is going to be that much worse.

Our Conservative portfolio gained 0.60%. Our Aggressive portfolio gained 0.26%. Benchmark Vanguard funds for November 2019 were as follows: Vanguard 500 Index Fund (VFINX), up 3.62%; Vanguard Total Bond Market Index Fund (VBMFX), down 0.06%; Vanguard Developed Markets Index Fund (VTMGX), up 1.40%; Vanguard Emerging Markets Stock Index (VEIEX), up 0.15%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 2.47%.

It wasn't a good month for our portfolio relative to benchmarks, as bonds were basically flat for the month, dragging at our bond funds. The US dollar rose a little, hurting our foreign bond funds and dragging on foreign stocks relative to the US market. We had one value fund Homestead Value (HOVLX) beat the S&P 500, while our foreign stock funds were up between zero and about half as much as the US market. Shorting anything but gold hurt our returns. Emerging markets and Italy were barely up at all. Utilities were down around 2%.

At this point, only in early 2000 was the US stock market more overpriced for stocks, creating a potential for a bigger decline than today. Yet that crash was easier to diversify out of, with much higher interest rates on cash and bonds back then, and lower valuations abroad and in smaller cap and value stocks. The next drop will probably be more like 2007—2009 with across-the-board global slides. On a more disturbing note, there will be less ammunition from the Federal Reserve and White House to fight the next big one than there was to fight the last two recessions and stock slides, as the US had ample room for debt expansion, and interest rate and tax cuts, in those past recessions.

The best case for stocks (other than a strong global economy for years to come, which is still possible) is interest rates remaining low globally and continuing to deliver negative inflation-adjusted yields for safe bonds in most countries, yet high enough inflation that stocks at least have inflatable dividend yields and earnings growth. In other words, you lose a little in bonds and gain a little in stocks.

A 10-year government bond yielding 0% in most major countries and maybe 1.75% in the US, with inflation 1—2% globally in major markets, is a dead-to-negative investment for a decade. But a stock market yielding 1.9% today, trading at 20+ times earnings, will deliver (if it ends up at the same valuation in 10 years) a slightly better-than-inflation return (with significant downside risk in a recession or valuation compression event). Even with zero dividends, the return will be an inflation-matching return with risk.

The lack of good options will keep the game afloat for years because there is too much money to invest globally — unless there is a scary event that makes a 50% loss seem possible. The real danger is not even higher inflation of, say, 3%+ but inflation going back to zero or negative, hurting stock prices in multiple ways including problems with companies making interest payments on their non-zero yield debt with flat-to-declining earnings. A similar (if not worse) phenomenon would happen in commercial and residential real estate, as rents flatten out or decline but interest is still due on the buildings with tenants. This is why deflation must always be stopped in its tracks — even if it means interest rates below inflation for even more years and decades to come

Economic expectations drifted back up somewhat, sending interest rates and stocks higher, but there is still significant fear the next recession is not far away. There are also percolating fears that, globally, central banks are not going to have an answer for the next downturn besides creating more money—a path that may be limited by inflation higher than experienced over much of the last decade. There just doesn't seem to be a way to get out of high levels of borrowing made by basically everyone at low rates. Even with the weak month for bonds, we had a decent month relative to benchmarks.

Our Conservative portfolio gained 0.22%. Our Aggressive portfolio rose 1.00%. Benchmark Vanguard funds for September 2019 were as follows: Vanguard 500 Index Fund (VFINX), up 1.86%; Vanguard Total Bond Market Index Fund (VBMFX), down 0.60%; Vanguard Developed Markets Index Fund (VTMGX), up 3.09%; Vanguard Emerging Markets Stock Index (VEIEX), up 1.33%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 0.90%.

The fear-buying of gold this year reversed last month as interest rates climbed. Oil also drifted down, as the economy globally just isn't strong enough for high oil prices. The levels we are at now basically require political problems in oil countries, of which there are plenty to go around. Value stocks seem to be taking the lead and European stocks did well, arguably because they are basically value stocks now. Small cap is doing well. There are more than a few signs that investors have overindulged on growth stories. Money-losing startups that own $60 million dollar private planes to jet founders between their different houses as well as business opportunities are on that list. We are going to have to make some adjustments soon.

The third trouble area (after global economic weakness and concerns that central banks are running out of options) is the current political issues facing the Whitehouse. In general, an impeachment event doesn't have much significant sway in the markets' longer run (and didn't in the late 1990s), but in theory it could send the country down a path where higher taxation isn't just required for budget reasons—we are already there—but more for punishment reasons or for elevated desires to redistribute wealth more than has already been done by the progressive tax code. More of a danger to markets is what the White House will do while under heat — this recent news of tariffs against European countries comes to mind.

Undoing the recent corporate tax cut by itself would likely lead to a large adjustment to stock prices that are now priced on higher after-tax profits. This won't be a major crash, as prices probably never really went up as much as possible because, in investors' eyes, the corporate tax cut was never going to be forever in full anyway. It doesn't help that the President warns of a market crash if he doesn't get his way on the off-chance he does not.

Collectively, none of these concerns would be particularly worrisome if we weren't already at very elevated valuations in stocks, and now bonds—and probably real estate, while you are at it. There is not much room for error. Interest rates are probably going to stay low globally for a long time. So, for the time being, if the economy stays reasonably strong, we can just stay in a high valuation world. What we don't need is a reason for investors to want out.

The U.S. market continued up in July and is back to record levels, erasing the losses of late 2018. With rising trade tensions as the catalyst and a backdrop of suspiciously low interest rates, August is looking to wipe out much of the recent gains with a roughly 800-point one-day drop in the Dow and interest rates plunging to levels last seen right before the last presidential election. We'll come back to the 800-point gorilla in the room after a review of last month.

In July, U.S. stocks did fine, while foreign stocks slipped. This, plus low positive returns in bonds, led to only slight gains in our more bond-heavy Conservative portfolio and slight losses in our more stock-heavy portfolio dragged down by foreign funds, more or less in line with the Vanguard STAR Fund, a global balanced portfolio, that we watch.

Our Conservative portfolio gained 0.63%. Our Aggressive portfolio declined 0.20%. Benchmark Vanguard funds for July 2019 were as follows: Vanguard 500 Index Fund (VFINX), up 1.43%; Vanguard Total Bond Market Index Fund (VBMFX), up 0.23%; Vanguard Developed Markets Index Fund (VTMGX), down 2.09%; Vanguard Emerging Markets Stock Index (VEIEX), down 1.19%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 0.52%.

Foreign markets are having a pretty good year but are lagging U.S. markets and were down in July. Healthcare was the main weak area in the United States, as constant talk of sticking it to the healthcare industry by both parties may be weighing on this industry, which has had years of above-market growth from increased subsidized health insurance and fast-rising prices for drugs and services. Our strongest areas in stocks last month were in value and telecom holdings, the latter boosted by new higher-technology stakes (which we are concerned about going forward from these levels).

Which brings us to the August situation. On the surface, this mini-slide started when the president re-upped his trade war tariff threats. Investors have seen many ups and downs in this often Twitter-based trade war with China, and frankly, the actual economic impact broadly speaking has been minimal. But then, the economy was strong and could shrug off minor issues. Now, with the bond market saying (through low long-term rates that are even lower than low short-term rates) that a global recession is coming soon, investors are getting nervous. We don't need a trade war with the number two economy in the world right now.

Adding relatively low tariffs to trade with one country was never really much of an economic drag for us. While there were certainly disruptions in specific industries, mostly commodities and agriculture, the consumer and most companies haven't felt much of a pinch.

This is partially explained by the fact that U.S. corporations are enjoying a major tax cut that exceeds by a wide margin the cost of tariffs they have to pay. Granted, some of the companies enjoying the most in tax breaks are not the ones paying the most in tariffs, but as a whole stock market, the tax cuts exceed the drag on earnings from tariffs. This doesn't mean that a trade war, if it doesn't achieve much, is a good idea, just that it shouldn't have to cause a recession.

But if you look at the history of sizable stock market slides, rarely was the trigger such a momentous economic event to warrant trillions in market value damage. In the last couple of decades, we had a crash from the Thai currency collapsing and from a default on old Soviet debt. Greece debt issues, which haven't even really gone away, once caused a major stir.

When you have jittery investors who have just seen fast gains over the previous years, you have an environment for a slide. Plus, we don't know what one relatively minor event leads to, because as Warren Buffett said, you don't know who is swimming naked until the tide goes out. For the record, Warren Buffett is sitting on a record amount of cash, probably waiting for the tide to go out so he can get some bargains.

Therefore, the real danger of a trade war with China is if we win, so to say. Most of the stuff coming in from China is really our brands anyway—we've basically set up factories or otherwise outsourced manufacturing to an efficient, low-cost, and low-regulation factory town. When was the last time you purchased an actual Chinese brand as opposed to just something made in China?

When we have a trade gap with China, it is because Apple makes phones in China and ships them here for sale. If the factory was in Texas (not going to happen, Apple just moved their last computer production from the United States to China), there would be a much smaller trade gap with China and a much higher price for phones and computers.

Through this lens, clearly we are paying the tariff. If the tariff threat ever does go up to include iPhones, either Apple is going to pay and eat the cost to keep the consumer price where it is or it is going to pass the cost on to the consumer. It could actually benefit Apple, because their leading competitor in higher-end phones, Samsung, makes their top-of-the-line phone in China. Apple has more money to subsidize tariffs. Maybe they'll have to pause their stock buyback program for a while.

How China pays is where the real economic trouble could happen. U.S. companies may cut down on demand from China. Walmart or, increasingly, Amazon may need less made-in-China items. If Apple doesn't eat the tariff and the price goes up, consumers may wait to buy a phone. All of this means that the suppliers in China temporarily lay off workers and stop buying from other suppliers. It could cause a recession—in China. Since China is a very leveraged high-growth country, this could cause unforeseen problems. Tesla is building a $2 billion factory near Shanghai. Without demand by the Chinese for these pricy cars, Tesla could default on debt.

It is worth noting that the manufacturing cost of most finished goods is a very small part of the retail price, so a 10% or even 25% increase in costs means a $100 sneaker may cost $1 more to manufacture. This isn't going to lead to much disruption to our consumers or our companies.

The latest shock to the market was when the Chinese currency declined in value, which we claim is currency manipulation, though it is exactly what you would expect if we bought less stuff in China and converted fewer dollars to Chinese currency.

On the plus side, interest rates are going so low so fast as to cause some sort of boost to an already pretty strong economy. This could all go away almost as fast as it has appeared. It really depends if people and companies go out and borrow more. Which will return us to the high-asset-price leveraged country that somehow can't handle even 2.5% short-term rates and not much higher long-term rates—which is what caused the short bear market last year in the first place.

The sharp rebound in stocks in early 2019 ended just as rapidly in May, with a 6.36% drop in the Vanguard 500 index fund including dividends. In late April, just days after the U.S. stock market broke through the old highs from September 2018 and gained back all the losses from late last year, stocks started falling. At one point in early June, the Nasdaq was back down around 10% from the recent highs—a percentage drop considered a correction (a bear market is 20%).

Last month's stock market weakness was pretty much across the globe, with no area showing positive returns. Bonds, however, continued to do well as interest rates plunged to the lowest levels since 2017. This interest rate action helped our portfolios fall much less than the market or the Vanguard balanced fund we use as a portfolio benchmark.

Our Conservative portfolio declined 0.50%. Our Aggressive portfolio declined 1.82%. Benchmark Vanguard funds for May 2019 were as follows: Vanguard 500 Index Fund (VFINX), down 6.36%; Vanguard Total Bond Market Index Fund (VBMFX), up 1.83%; Vanguard Developed Markets Index Fund (VTMGX), down 5.26%; Vanguard Emerging Markets Stock Index (VEIEX), down 6.45%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, down 3.90%.

What makes this behavior interesting is how it related to interest rates. Last year, the stock slide started because interest rates were going up somewhat sharply. The Federal Reserve was raising shorter-term rates and longer-term rates were creeping up as well. Then panic set in that rising rates might cause another recession, as the global economy seemed to be wobbling and trade war fears seemed menacing. After a few weeks of dropping late last year, the stock market was down around 20% from earlier highs or the level that is considered a bear market. The Federal Reserve calmed everyone down and noted they will not keep raising rates, but by then falling longer-term rates had already started declining.

After the holidays, the stock market turned around and the global economy looked a little better. Investors regained confidence that with lower rates and resulting lower mortgage rates, the economy should stay strong. Good jobs and GDP numbers this year helped with this narrative. Then a funny/not funny thing happened: rates kept going down, actually plunging in recent days, at one point down to around just 2.08% on the 10-year government bond. This equates to a sub 4% thirty-year mortgage. Rates were more than one full percentage point higher last November, at just over 3.2% for comparison. The fear now in stocks is that surely a recession is coming or why would interest rates be so low? Unlike past bouts of low rates, short-term rates are not about as high as longer-term rates, thanks to the Fed raising rates. This sort of spread further scares investors that we are heading into recession.

Where we go from here is either we're going to get a recession in the next year or so and the market will probably fall another 20% or more early in that trajectory of economic slowdown, or we start getting even hotter economic numbers boosted from the now lower interest rates, and then rates will climb back up with stocks and maybe inflation, hurting bonds.

With all that interest rate action trying to forecast our economic future, we have a parallel problem on the growth side of the stock market in technology. Some recent troubles at Tesla, Uber, and the like seem to point to no end in profitless growth for some hot tech names, while the hot tech names that actually mint money, like Google, Apple, and Facebook may be near the end of high margins and growth resulting more and more from their monopoly status.

In our portfolios, our own losses in stock funds were largely offset by gains in our short funds (except gold), which were all up double digits, and big gains in longer-term bonds with Vanguard Extended Duration Treasury (EDV) up 9.74% and Vanguard Long-Term Bond Index ETF (BLV) up 4.16%. Higher-risk bonds moved down with stocks, which is why Dodge & Cox Global Bond Fund (DODLX) was down 0.46%—our only negative bond fund last month.

The trouble going forward is we are losing our upside potential from our long-term bonds the lower rates go, though it is worth noting that rates are much lower in other major economies. At some point we're either going to have to move to stocks or short-term bonds. The trouble with short-term bonds is that although you are protected somewhat from rates going back up, you are not protected from rates going down even more. In all likelihood the Federal Reserve is going to be lowering rates later this year if the economy trips. This is going to send a 2% yield on shorter-term bond funds down towards 1% again. It might make more sense to just keep the longer-term bonds and slightly increase stocks, so you have more offsetting gains should rates go back up, hurting longer-term bonds.

Looking at fund investor behavior over the last six months of this wild stock and bond market has shown what not to do. First, back in October, investors started pulling money out of bond funds right as rates peaked and after some weak returns in bond funds, and bonds started to do well again. Then fund investors started taking money out of stocks more aggressively in December (with near $60 billion out that month alone) and January around the bottom in stocks. The money hasn't come back in much in stocks during the recovery earlier this year, but, broadly speaking, between bonds and stocks, stocks are less in favor with fund flows and probably are the better choice going forward if you can stomach the risk of being in stocks going into a recession.

Apparently the slide scared the Federal Reserve because on June 4th the market turned back up sharply on the near guarantee of lower rates and easy monetary policy from the Fed.