Finally a down month for U.S. stocks – the first since October 2012. June was a rough month for mostly everything.
Almost all yield-oriented foreign investments were already sliding, and U.S. stocks finally got caught up in the downdraft. The S&P 500 fell 1.35%, although the drop in the index was better than the average returns in essentially all categories of funds except short term bonds and small cap growth, including many of our own holdings. It was a bad month to be diversified.
While still low, mid- to longer-term interest rates have risen by about one percentage point since the bottom on May 2nd. Safe, shorter-term yields are still less than zero. Without a strong underlying economy or at least rising inflation, stocks – if not all assets – should go down in price with higher rates.
The scary part is that bonds are often added to a portfolio to lower risk as their value tends to go up during economic rough patches, offsetting losses in stocks. But if stocks and bonds fall at the same time, everyone's portfolio just got a little more risky.
More of a concern is what a bond panic would look like – even if that panic were baseless in terms of rising inflation or default fears. We’ve certainly had baseless panics before, some small, some large. Not too long ago there was a muni bond panic caused by fears of widespread defaults from a well quoted analyst. This panic only led to good future returns for those buying on the way down as no default wave materialized.
But with hundreds of billions going into bonds through funds in recent years – increasingly in tradable ETFs – one has to wonder what will happen to prices if enough investors run for the door. The knock on rising rates from the forced sales by fund managers could cause a recession.
As so much money has favored bonds and ETFs, ordinary stock mutual funds are having trouble bringing in assets. This has led to an increasing number of smaller funds liquidating or merging out of existence. The latest casualty has been our own Aggressive Portfolio holding Scout International Discovery (UMBDX), which was liquidated at the end of June (after the fund paid out all the capital gains on the books to remaining shareholders in the form of a large dividend almost entirely composed of lower-tax long-term capital gains). The fund was an underwhelming performer overall but still beat many international and emerging market index and actively managed funds (not to mention many popular ETFs with billions in assets ) while we owned it. We will be moving this cash to new funds soon. Stay tuned.
June 2013 Performance Review
Finally a down month for U.S. stocks – the first since October 2012. June was a rough month for mostly everything.
Almost all yield-oriented foreign investments were already sliding, and U.S. stocks finally got caught up in the downdraft. The S&P 500 fell 1.35%, although the drop in the index was better than the average returns in essentially all categories of funds except short term bonds and small cap growth, including many of our own holdings. It was a bad month to be diversified.
Our Conservative portfolio was down 1.81% in June. Our Aggressive portfolio was fell 1.89%. Benchmark Vanguard funds for June 2013: 500 Index (VFINX) down 1.35%, Total Bond Market Index (VBMFX) down 1.65%, International Index (VTMGX) down 2.88%, Emerging Markets Stock Index (VEIEX) down 6.14%, Vanguard STAR (VGSTX) total balanced portfolio down 2.14%. That’s a lot of downs.
While still low, mid- to longer-term interest rates have risen by about one percentage point since the bottom on May 2nd. Safe, shorter-term yields are still less than zero. Without a strong underlying economy or at least rising inflation, stocks – if not all assets – should go down in price with higher rates.
The scary part is that bonds are often added to a portfolio to lower risk as their value tends to go up during economic rough patches, offsetting losses in stocks. But if stocks and bonds fall at the same time, everyone's portfolio just got a little more risky.
More of a concern is what a bond panic would look like – even if that panic were baseless in terms of rising inflation or default fears. We’ve certainly had baseless panics before, some small, some large. Not too long ago there was a muni bond panic caused by fears of widespread defaults from a well quoted analyst. This panic only led to good future returns for those buying on the way down as no default wave materialized.
But with hundreds of billions going into bonds through funds in recent years – increasingly in tradable ETFs – one has to wonder what will happen to prices if enough investors run for the door. The knock on rising rates from the forced sales by fund managers could cause a recession.
As so much money has favored bonds and ETFs, ordinary stock mutual funds are having trouble bringing in assets. This has led to an increasing number of smaller funds liquidating or merging out of existence. The latest casualty has been our own Aggressive Portfolio holding Scout International Discovery (UMBDX), which was liquidated at the end of June (after the fund paid out all the capital gains on the books to remaining shareholders in the form of a large dividend almost entirely composed of lower-tax long-term capital gains). The fund was an underwhelming performer overall but still beat many international and emerging market index and actively managed funds (not to mention many popular ETFs with billions in assets ) while we owned it. We will be moving this cash to new funds soon. Stay tuned.