U.S. stocks shrugged off their slide of over 10% this year with a strong 3.7% jump in the S&P 500 in March. The Nasdaq, heavy in growth stocks, rebounded from a short-lived 20% drop — technically in bear market territory. At the end of March the S&P 500 was down just under 5% for the year, and the Nasdaq just under 10%. With bonds and foreign stocks mostly down around 6% for the year, diversifying isn't helping.
Our Aggressive portfolio is down just 1.74% for the year but our Conservative portfolio is down 5.55%, more in line with benchmarks. Longer-term bonds have been the biggest drag on our Conservative portfolio, with drops of 13.06% and 10.47% over the past three months in Vanguard Long-Term Bond Index ETF (BLV) and Vanguard Extended Duration Treasury (EDV) respectively, though our shorter-term bond funds, such as the recently added Vanguard Mortgage-Backed Securities (VMBS), are also down just under 5% for the year. Other losers include Franklin FTSE Germany (FLGR), down 13.4% in 2022; Germany, as a major destination for Russian oil and natural gas, is the EU country with perhaps the most financial risk from the war in Ukraine. There is almost no scenario in which Russia sees a major impact on inflows of money without Germany seeing an energy shortage. It is akin to our own problems with the OPEC embargo in the 1970s.
Besides shorts, support to our Aggressive portfolio was provided by VanEck Vectors Pharma. (PPH) and Vanguard Utilities (VPU). Safer stocks are doing well, especially relative to speculative growth stocks with little or no earnings. Such former high flyers are down on average by over 50% from their 2021 highs, though they have rebounded during the latest dip buying.
The one-month return for Franklin FTSE Brazil (FLBR) was an astounding 14.38%, completing a 34.78% return for the quarter. Brazil has already benefited from high energy and commodity prices in recent months, and is a likely source for many exports currently coming from Russia. Our biggest misses this year are exiting inflation-adjusted bonds and energy stocks too soon, though inflation-adjusted bond funds are still down for the year — just not quite as much as other bond funds.
Energy funds are the top performing category for the year, up about 33%. China funds are down for the month and year, and our Franklin FTSE China (FLCH) holding was down 9.69% for the month and 15.07% for the year. There has been a huge rebound in Chinese stocks in recent weeks, off a much lower low. It appears that the Chinese government is easing its crackdown on tech company power. We may increase this stake. There are lingering fears that a property bubble has already popped, and that the damage will not be repaired easily. Many stocks face delisting in the U.S. market for not meeting our regulatory standards. There is also the possibility of China siding with Russia sufficiently to trigger significant sanctions. But it is unlikely that companies will write off business in China — a huge part of the supply chain and of many companies' revenues — as quickly as the West did with Russia, a much smaller economy with limited business ties to the U.S.
If this recent dip buying is to work out, we will have to see higher interest rates not crushing the economy into recession, as has often happened. The yield curve recently went negative, meaning that two-year Treasury bonds now yield more than ten-year bonds. This usually happens when a recession is near and investors don't expect inflation or growth in a recession. We're already seeing 30-year mortgage rates approach 5%, which is a big increase from recent months at around 3%. So far this hasn't hit the roaring real estate market.
In a real speculative mania economy, Federal Reserve rate hikes don't hit the speculation right away, only the 'real' economy. If investors are convinced they will make 10% a year or more in stocks, real estate, and now crypto, then whether it costs 3% or 6% or 9% is not that relevant, so long as loans are available. There are already signs that banks are loosening lending requirements, adjusting to the higher mortgage payments. We're not quite at negative amortization NINJA loans (no income no job) but we're moving slowly in that direction.
March 2022 Performance Review
U.S. stocks shrugged off their slide of over 10% this year with a strong 3.7% jump in the S&P 500 in March. The Nasdaq, heavy in growth stocks, rebounded from a short-lived 20% drop — technically in bear market territory. At the end of March the S&P 500 was down just under 5% for the year, and the Nasdaq just under 10%. With bonds and foreign stocks mostly down around 6% for the year, diversifying isn't helping.
Our Conservative portfolio declined 0.55% and our Aggressive portfolio gained 0.80%. Benchmark Vanguard funds performed as follows in March 2022: Vanguard 500 Index Fund (VFINX), up 3.70%; Vanguard Total Bond Index (VBMFX), down 2.83%; Vanguard Developed Mkts Index (VTMGX), up 0.30%; Vanguard Emerging Mkts Index (VEIEX), down 2.47%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, down 0.23%.
Our Aggressive portfolio is down just 1.74% for the year but our Conservative portfolio is down 5.55%, more in line with benchmarks. Longer-term bonds have been the biggest drag on our Conservative portfolio, with drops of 13.06% and 10.47% over the past three months in Vanguard Long-Term Bond Index ETF (BLV) and Vanguard Extended Duration Treasury (EDV) respectively, though our shorter-term bond funds, such as the recently added Vanguard Mortgage-Backed Securities (VMBS), are also down just under 5% for the year. Other losers include Franklin FTSE Germany (FLGR), down 13.4% in 2022; Germany, as a major destination for Russian oil and natural gas, is the EU country with perhaps the most financial risk from the war in Ukraine. There is almost no scenario in which Russia sees a major impact on inflows of money without Germany seeing an energy shortage. It is akin to our own problems with the OPEC embargo in the 1970s.
Besides shorts, support to our Aggressive portfolio was provided by VanEck Vectors Pharma. (PPH) and Vanguard Utilities (VPU). Safer stocks are doing well, especially relative to speculative growth stocks with little or no earnings. Such former high flyers are down on average by over 50% from their 2021 highs, though they have rebounded during the latest dip buying.
The one-month return for Franklin FTSE Brazil (FLBR) was an astounding 14.38%, completing a 34.78% return for the quarter. Brazil has already benefited from high energy and commodity prices in recent months, and is a likely source for many exports currently coming from Russia. Our biggest misses this year are exiting inflation-adjusted bonds and energy stocks too soon, though inflation-adjusted bond funds are still down for the year — just not quite as much as other bond funds.
Energy funds are the top performing category for the year, up about 33%. China funds are down for the month and year, and our Franklin FTSE China (FLCH) holding was down 9.69% for the month and 15.07% for the year. There has been a huge rebound in Chinese stocks in recent weeks, off a much lower low. It appears that the Chinese government is easing its crackdown on tech company power. We may increase this stake. There are lingering fears that a property bubble has already popped, and that the damage will not be repaired easily. Many stocks face delisting in the U.S. market for not meeting our regulatory standards. There is also the possibility of China siding with Russia sufficiently to trigger significant sanctions. But it is unlikely that companies will write off business in China — a huge part of the supply chain and of many companies' revenues — as quickly as the West did with Russia, a much smaller economy with limited business ties to the U.S.
If this recent dip buying is to work out, we will have to see higher interest rates not crushing the economy into recession, as has often happened. The yield curve recently went negative, meaning that two-year Treasury bonds now yield more than ten-year bonds. This usually happens when a recession is near and investors don't expect inflation or growth in a recession. We're already seeing 30-year mortgage rates approach 5%, which is a big increase from recent months at around 3%. So far this hasn't hit the roaring real estate market.
In a real speculative mania economy, Federal Reserve rate hikes don't hit the speculation right away, only the 'real' economy. If investors are convinced they will make 10% a year or more in stocks, real estate, and now crypto, then whether it costs 3% or 6% or 9% is not that relevant, so long as loans are available. There are already signs that banks are loosening lending requirements, adjusting to the higher mortgage payments. We're not quite at negative amortization NINJA loans (no income no job) but we're moving slowly in that direction.