In January, the roughly 50% crash in higher flying mania stocks that started earlier in 2021 finally spread to the rest of the stock market — the market with earnings. The current explanation is the market doesn't like all this talk of raising rates to trim inflation as it could work a little too well and hurt the economy, stock market, and real estate. The bond market took a hit as rates rose in anticipation of less support from the Federal Reserve. Foreign markets were a little stronger as their relative value may have offered some support to suddenly high-valuation-shy investors.
From the peak in early January, the US market promptly fell 10% — a correction by Wall Street's overly positive terminology. Then, as fast as the slide, the dip buying kicked in, with a roughly 5% move up in the last few days of the month through the end of February 1, leaving the S&P 500 down only 5.18% for the month.
Our returns relative to the benchmarks were good, though giving energy funds the heave-ho late last year was a tad early as we missed the hottest fund category of January. Recently sold Vanguard Energy (VDE) was up 17.48% last month. All was not lost. Latin America funds, themselves heavily influenced by rising commodity prices, were one of the few hot areas in January, taking our holding Franklin FTSE Brazil (FLBR) up 13.37%.
About 90% of fund categories were down in January, but the hardest hit areas were growth stocks, with only modest losses in value stocks. While emerging markets as a group were basically flat to slightly down, single regions differed wildly. South Korea dragged on our returns by underperforming the S&P 500, but in general all our other funds beat the falling US market.
Bonds were hit hard, which largely explains why our Conservative portfolio fell harder than our Aggressive portfolio. This is the danger of relying too heavily on bonds for safety in a high-inflation, low-interest rate environment. Normally in a 10% down period for stocks, bonds would do well offsetting losses. Now rising rates are dragging on stocks. Our riskier bond fund, iShares JP Morgan Em. Bond (LEMB), was our only bond fund with a positive return (0.66%). The rest sank with Vanguard Extended Duration Treasury (EDV) at the bottom of the barrel, down 4.73%, followed by Vanguard Long-Term Bond Index ETF (BLV) down 4.27% — around double the broader bond market's drop.
Inflation-protected bond funds took a hit as well, down around 1.7% for the month, as the expectation is that the Fed will raise rates and it will likely put a lid on inflation, giving investors no more protection than regular bond funds at this point — only with the potential for greater losses than non-inflation-adjusted government bonds if the Fed is a little too successful in stamping out inflation. Our recent move out of inflation-adjusted bonds into regular safe bonds offered no benefits here, as both sank in January.
Even with the 50% crush in speculative stocks including SPACS, meme stocks, Crypto, so-called stonks, and earning-less stocks of the future, the broader stock market is hardly a cheap market. In theory, high inflation and low rates mean stocks have a shot of growing into their elevated valuations.
Nobody knows where rates and inflation are going to go, but a soft landing may not be on the cards this time around. Covid stimulus spending is fast waning, and sub-3% mortgage rates are in the rear-view mirror.
There could also be a wealth effect loss from all the trillions of paper wealth that has disappeared in a few months. A 5% hit to your 401k isn't going to drag the economy down. A 50% hit to your Robinhood account may. We're all lucky this speculative bubble didn't get any bigger than it did last year or we'd be looking at a repeat of 2008, when falling real estate took the whole kit and caboodle down with it.
This 10% drop may just be another in the long line of dips to buy. Historically, when an underlying bubble is popping, 10% is only the beginning of a bigger drop. 2000 dot com bubble, 2007 real estate and bubble, 2021 crypto and crappo stocks? We'll see.
January 2022 Performance Review
In January, the roughly 50% crash in higher flying mania stocks that started earlier in 2021 finally spread to the rest of the stock market — the market with earnings. The current explanation is the market doesn't like all this talk of raising rates to trim inflation as it could work a little too well and hurt the economy, stock market, and real estate. The bond market took a hit as rates rose in anticipation of less support from the Federal Reserve. Foreign markets were a little stronger as their relative value may have offered some support to suddenly high-valuation-shy investors.
Our Conservative portfolio declined 2.88%, and our Aggressive portfolio declined 0.90%. Benchmark Vanguard funds for January 2022 were as follows: Vanguard 500 Index Fund (VFINX), down 5.18%; Vanguard Total Bond Index (VBMFX), down 2.19%; Vanguard Developed Mkts Index (VTMGX), down 3.95%; Vanguard Emerging Mkts Index (VEIEX), up 0.42%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, down 4.35%.
From the peak in early January, the US market promptly fell 10% — a correction by Wall Street's overly positive terminology. Then, as fast as the slide, the dip buying kicked in, with a roughly 5% move up in the last few days of the month through the end of February 1, leaving the S&P 500 down only 5.18% for the month.
Our returns relative to the benchmarks were good, though giving energy funds the heave-ho late last year was a tad early as we missed the hottest fund category of January. Recently sold Vanguard Energy (VDE) was up 17.48% last month. All was not lost. Latin America funds, themselves heavily influenced by rising commodity prices, were one of the few hot areas in January, taking our holding Franklin FTSE Brazil (FLBR) up 13.37%.
About 90% of fund categories were down in January, but the hardest hit areas were growth stocks, with only modest losses in value stocks. While emerging markets as a group were basically flat to slightly down, single regions differed wildly. South Korea dragged on our returns by underperforming the S&P 500, but in general all our other funds beat the falling US market.
Bonds were hit hard, which largely explains why our Conservative portfolio fell harder than our Aggressive portfolio. This is the danger of relying too heavily on bonds for safety in a high-inflation, low-interest rate environment. Normally in a 10% down period for stocks, bonds would do well offsetting losses. Now rising rates are dragging on stocks. Our riskier bond fund, iShares JP Morgan Em. Bond (LEMB), was our only bond fund with a positive return (0.66%). The rest sank with Vanguard Extended Duration Treasury (EDV) at the bottom of the barrel, down 4.73%, followed by Vanguard Long-Term Bond Index ETF (BLV) down 4.27% — around double the broader bond market's drop.
Inflation-protected bond funds took a hit as well, down around 1.7% for the month, as the expectation is that the Fed will raise rates and it will likely put a lid on inflation, giving investors no more protection than regular bond funds at this point — only with the potential for greater losses than non-inflation-adjusted government bonds if the Fed is a little too successful in stamping out inflation. Our recent move out of inflation-adjusted bonds into regular safe bonds offered no benefits here, as both sank in January.
Even with the 50% crush in speculative stocks including SPACS, meme stocks, Crypto, so-called stonks, and earning-less stocks of the future, the broader stock market is hardly a cheap market. In theory, high inflation and low rates mean stocks have a shot of growing into their elevated valuations.
Nobody knows where rates and inflation are going to go, but a soft landing may not be on the cards this time around. Covid stimulus spending is fast waning, and sub-3% mortgage rates are in the rear-view mirror.
There could also be a wealth effect loss from all the trillions of paper wealth that has disappeared in a few months. A 5% hit to your 401k isn't going to drag the economy down. A 50% hit to your Robinhood account may. We're all lucky this speculative bubble didn't get any bigger than it did last year or we'd be looking at a repeat of 2008, when falling real estate took the whole kit and caboodle down with it.
This 10% drop may just be another in the long line of dips to buy. Historically, when an underlying bubble is popping, 10% is only the beginning of a bigger drop. 2000 dot com bubble, 2007 real estate and bubble, 2021 crypto and crappo stocks? We'll see.