The stock market continues to rebound from all the traumatic events of the past year or so. Strangely, this is not due to particularly strong expectations for growth globally; it appears to be mostly related to interest rates declining in anticipation of an economic slowdown. The rate decline pushed up bond prices again, keeping us more or less in the ballpark of more stock-heavy (and risky) portfolios.
While there are continued fears over the trade war leading to gyrations in stock prices, the real risk is whether we get a global economic slowdown — which, if it happens, probably won't be because of a relatively small trade war of a few billion dollars a year in taxes, a sum eclipsed by the tax cuts we have already received.
The stock market doesn't seem to think a real economic slowdown is in the cards as it makes record highs, but the bond market says a recession is likely — it is like two different economies.
Stock market investors are hoping that the low interest rates caused by fear of a global slowdown will lead to the economy avoiding a recession from the boosting of low rates. In addition, the expectation is now that the Federal Reserve will lower rates soon to fight the slowdown, and it will work maybe a little too well. Basically, investors are hoping the economy looks worse than it actually is and that low rates will juice the economy, just like the tax cuts and increased spending did last year. This may not be as crazy as it sounds, given we're even considering cutting rates to boost an economy with a 3.6% unemployment rate — and the short-term rates the Fed controls directly never broke 2.5% on the way up, which is less than half the level of before the 2008 recession.
None of this addresses how we will buy ourselves out of a serious recession, if one appears. We have government power split dysfunction again, and have already lowered taxes and increased spending — a de facto stimulus plan. All the Fed can do is lower short-term rates by a couple of percentage points, after which we have little available in turbo boost except more money creation to buy our own debt.
We will probably need to create money to buy our debt because our yearly deficit will quickly skyrocket above $1 trillion. It is already going to be around $900 billion for this fiscal year, and that's in good times. In 2009 the deficit about tripled to $1.4T from the previous year. Next time around we may have to raise taxes in a recession to keep the deficit under $2T. Or try Modern Monetary Theory, or MMT, the hipster central bank strategy of just printing money to pay for stuff. Apparently that is a question for another day, because record stock market closes continue…
June 2019 Performance Review
The stock market continues to rebound from all the traumatic events of the past year or so. Strangely, this is not due to particularly strong expectations for growth globally; it appears to be mostly related to interest rates declining in anticipation of an economic slowdown. The rate decline pushed up bond prices again, keeping us more or less in the ballpark of more stock-heavy (and risky) portfolios.
Our Conservative portfolio gained 3.17%. Our Aggressive portfolio gained 3.49%. The results for benchmark Vanguard funds for June 2019 were as follows: Vanguard 500 Index Fund (VFINX), up 7.03%; Vanguard Total Bond Market Index Fund (VBMFX), up 1.15%; Vanguard Developed Markets Index Fund (VTMGX), up 5.93%; Vanguard Emerging Markets Stock Index (VEIEX), up 5.42%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 5.07%.
While there are continued fears over the trade war leading to gyrations in stock prices, the real risk is whether we get a global economic slowdown — which, if it happens, probably won't be because of a relatively small trade war of a few billion dollars a year in taxes, a sum eclipsed by the tax cuts we have already received.
The stock market doesn't seem to think a real economic slowdown is in the cards as it makes record highs, but the bond market says a recession is likely — it is like two different economies.
Stock market investors are hoping that the low interest rates caused by fear of a global slowdown will lead to the economy avoiding a recession from the boosting of low rates. In addition, the expectation is now that the Federal Reserve will lower rates soon to fight the slowdown, and it will work maybe a little too well. Basically, investors are hoping the economy looks worse than it actually is and that low rates will juice the economy, just like the tax cuts and increased spending did last year. This may not be as crazy as it sounds, given we're even considering cutting rates to boost an economy with a 3.6% unemployment rate — and the short-term rates the Fed controls directly never broke 2.5% on the way up, which is less than half the level of before the 2008 recession.
None of this addresses how we will buy ourselves out of a serious recession, if one appears. We have government power split dysfunction again, and have already lowered taxes and increased spending — a de facto stimulus plan. All the Fed can do is lower short-term rates by a couple of percentage points, after which we have little available in turbo boost except more money creation to buy our own debt.
We will probably need to create money to buy our debt because our yearly deficit will quickly skyrocket above $1 trillion. It is already going to be around $900 billion for this fiscal year, and that's in good times. In 2009 the deficit about tripled to $1.4T from the previous year. Next time around we may have to raise taxes in a recession to keep the deficit under $2T. Or try Modern Monetary Theory, or MMT, the hipster central bank strategy of just printing money to pay for stuff. Apparently that is a question for another day, because record stock market closes continue…
Our only S&P-beating stock fund performer in June was iShares MSCI Italy Capped (EWI), up 9.72% as a rising euro and receding fears of politically oriented economic problems boosted prices. Yield-oriented funds such as Vanguard Telecom Services ETF (VOX), Vanguard Utilities (VPU), and iShares Global Telecom ETF (IXP) were our weakest non-short funds, with gains between roughly 3% and 4%. This was a month when the S&P 500 beat almost all fund categories, except in a few strong areas such as Latin America and Precious Metals. Our longer-term and foreign bonds did well compared to the bond index with a 3.43% return for SPDR Barclays Intl. Treasury (BWX), a 2.79% return for Dodge & Cox Global Bond Fund (DODLX) and a 2.69% return for Vanguard Long-Term Bond Index ETF (BLV).