The US stock market rebounded strongly in October, rising over 8%. It was an even better month for value-oriented stocks and energy stocks, which helped push the Dow up 14%, its best month since the 1970s. The Federal Reserve’s interest rate increase and press conference in early November stoked fears of even higher rates to fight inflation, and reversed some of the gains. Bonds continued to slide, and 2022 is becoming the worst year in history for the bond market. Most large foreign markets did well, but not as well as the US. Emerging market funds were down, largely because of continued troubles in China.
As a sign of how strange this year has been for investors, as of October 31 the Vanguard STAR fund was down 20.53% compared to the S&P 500’s 17.75% decline. As this globally balanced fund is only around 60% in stocks, this is a remarkable development. Bonds have declined as much as stocks have in 2022. Foreign stocks are down more than US stocks, largely because of a sharply rising US dollar. The cumulative drag of bonds, China, and shorting weighed on our returns in October. Our Aggressive portfolio has fallen slightly less than the S&P 500 this year, with a negative 16.16% return. Our Conservative portfolio is more in line with the Vanguard STAR fund and is down 20.78%.
Value stocks did well, lifting Vanguard Value Index (VTV) by 11.73% and Homestead Value Fund (HOVLX) by 11.45%. But that, and the handful of our other funds that beat the S&P 500 last month, didn’t make up for heavy losses in longer term bonds. Our move to increase long-term bonds in June was premature. Vangaurd L/T Treasury (VGLT) was down 5.2% for the month, while Vanguard Extended Duration Treasury (EDV) fell a whopping 9.08%. Long-term bond funds in general are now down over 30% for the year – far more than the S&P 500 and more akin to technology shares.
The only really hot area was energy, up 22% for the month as oil prices headed up again. This was an area we moved into during COVID-19, when the oil price collapsed and was sold way too early. Our Franklin FTSE Brazil (FLBR) fund was up 9.89% for the month and 20.97% for the year as the country is something of a natural resource play, but we’d prefer this year’s roughly 50% gains in energy funds. Energy, commodities, and Latin America are the only fund categories up this year. Most are down by double-digit percentages.
Except for so-called digital asset funds, which own crypto-related ‘investments’ and are down 58% in 2022, the worst category of funds this year (and last month) is funds investing in China. Our own Franklin FTSE China (FLCH) was down 15.83% for the month and 42.33% for 2022 as a grab bag of political and economic issues hit the already weak market.
Long-term interest rates at over 4% for government bonds and 6% for corporate investment grade bonds will be hard for stocks to beat over the next few years, unless the Fed is unable to get inflation under 3% and the economy and earnings keep inflating at the expense of bond holders, but with no recession. More likely we’ll eventually have a fairly deep recession, falling inflation, and a return to low interest rates. This will reward locking in some longer term high yields, and give some potential upside that can be shifted into stocks at even lower prices than are on offer today.
October 2022 Performance Review
The US stock market rebounded strongly in October, rising over 8%. It was an even better month for value-oriented stocks and energy stocks, which helped push the Dow up 14%, its best month since the 1970s. The Federal Reserve’s interest rate increase and press conference in early November stoked fears of even higher rates to fight inflation, and reversed some of the gains. Bonds continued to slide, and 2022 is becoming the worst year in history for the bond market. Most large foreign markets did well, but not as well as the US. Emerging market funds were down, largely because of continued troubles in China.
As a sign of how strange this year has been for investors, as of October 31 the Vanguard STAR fund was down 20.53% compared to the S&P 500’s 17.75% decline. As this globally balanced fund is only around 60% in stocks, this is a remarkable development. Bonds have declined as much as stocks have in 2022. Foreign stocks are down more than US stocks, largely because of a sharply rising US dollar. The cumulative drag of bonds, China, and shorting weighed on our returns in October. Our Aggressive portfolio has fallen slightly less than the S&P 500 this year, with a negative 16.16% return. Our Conservative portfolio is more in line with the Vanguard STAR fund and is down 20.78%.
In October our Conservative portfolio gained 2.04% and our Aggressive portfolio gained 1.02%. The performances of benchmark Vanguard funds were as follows: Vanguard 500 Index Fund (VFINX), up 8.09%; Vanguard Total Bond Index (VBMFX), down 1.38%; Vanguard Developed Mkts Index (VTMGX), up 5.91%; Vanguard Emerging Mkts Index (VEIEX), down 3.45%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 3.66%.
Value stocks did well, lifting Vanguard Value Index (VTV) by 11.73% and Homestead Value Fund (HOVLX) by 11.45%. But that, and the handful of our other funds that beat the S&P 500 last month, didn’t make up for heavy losses in longer term bonds. Our move to increase long-term bonds in June was premature. Vangaurd L/T Treasury (VGLT) was down 5.2% for the month, while Vanguard Extended Duration Treasury (EDV) fell a whopping 9.08%. Long-term bond funds in general are now down over 30% for the year – far more than the S&P 500 and more akin to technology shares.
The only really hot area was energy, up 22% for the month as oil prices headed up again. This was an area we moved into during COVID-19, when the oil price collapsed and was sold way too early. Our Franklin FTSE Brazil (FLBR) fund was up 9.89% for the month and 20.97% for the year as the country is something of a natural resource play, but we’d prefer this year’s roughly 50% gains in energy funds. Energy, commodities, and Latin America are the only fund categories up this year. Most are down by double-digit percentages.
Except for so-called digital asset funds, which own crypto-related ‘investments’ and are down 58% in 2022, the worst category of funds this year (and last month) is funds investing in China. Our own Franklin FTSE China (FLCH) was down 15.83% for the month and 42.33% for 2022 as a grab bag of political and economic issues hit the already weak market.
Long-term interest rates at over 4% for government bonds and 6% for corporate investment grade bonds will be hard for stocks to beat over the next few years, unless the Fed is unable to get inflation under 3% and the economy and earnings keep inflating at the expense of bond holders, but with no recession. More likely we’ll eventually have a fairly deep recession, falling inflation, and a return to low interest rates. This will reward locking in some longer term high yields, and give some potential upside that can be shifted into stocks at even lower prices than are on offer today.