There was a radical reversal in market leadership in July, with smaller-cap stocks climbing and larger-cap growth stocks sinking. The small-cap move was a roughly 10% jump in just a few days in July. In early August, the entire stock market dropped sharply, though it has mostly recovered. When U.S. large-cap growth stock leadership flips, we tend to do well, and we had a solid benchmark-beating month, the first in quite some time.
The expectation is that the economy and inflation are slowing, and the Fed will soon lower rates. This boosted bonds and sent large-cap tech down sharply while small-cap stocks surged. The logic, if there is any beyond wild swings in bets, is that smaller-cap stocks need rates to come down to do well and have lagged because of it. This doesn't really explain why so many non-mega-cap stocks are not doing well earnings-wise, even though they locked in low rates years ago, but so be it. The expectation for lower rates sent the yen up after years of weakness as investors supposedly borrowed at low rates in yen and invested elsewhere for fat profits. The Bank of Japan also raised rates, further reducing this wide gap. The U.S. dollar weakened slightly. All this was good for our foreign holdings, bonds, and shorts on big-cap tech.
Japan was strong with a 4.38% return for Franklin FTSE Japan ETF (FLJP), though this has quickly unwound with recent big slides in Japanese stocks. LeatherBack L/S Alt. Yld. (LBAY) had a particularly good month shorting growth stocks and going long on more value-oriented names, delivering a 5.32% return for the month, barely beaten by ProShares UltraShort QQQ (QID) delivering a 5.41% bump as tech sank. Value was strong with Vanguard Value Index (VTV) up 5.4%. It has been rare that the majority of our funds beat the S&P 500, but July delivered. Note that the S&P 500 has beaten the majority of all fund categories for years now, not just our picks. Our only losers last month were our short Proshares Short Bitcoin (BITI), down 9.4%, a 1.37% drop in Franklin FTSE China (FLCH), and a 1.08% slide in Vanguard Communication ETF (VOX), which is large-cap tech-heavy.
Rates dropped across the board, pushing up our longer-term bond funds. Vanguard Extended Duration Treasury (EDV) jumped 4.03%, while Vangaurd L/T Treasury (VGLT) moved up 3.53%, followed by Vanguard Long-Term Bond Index ETF (BLV) up 3.39%. The only reason we're not more excited about bond performance going forward is that so much money has flowed into bonds in recent months, trying to lock in higher rates. If it starts to look like inflation isn't under control, we could see some of this hot money reverse course fast and send bonds back down again. If inflation expectations keep dropping, we could go back into inflation-adjusted bonds.
The great small-cap rally of July quickly fizzled out in August. While small-cap has lagged large-cap, it hasn't been by that much when you consider how much small-cap outperformed large-cap in the 2000s. Adjusting for slow growth, it’s debatable if there’s so much value in small-cap value relative to, say, 2000 when tech was more overpriced compared to value. It is likely that the values abroad are better than the relative U.S. value compared to growth.
For now, wild gyrations are back, with daily swings higher than we've seen in years. There are plenty of signs we've licked inflation without causing a recession, but plenty that say the recession train is still coming, just a little delayed. In recent weeks, riskier debt has stumbled, meaning bonds that do poorly in recessions because of rising default rates are starting to fall on days when safe government bonds do well—something more typical in a recession where investors flock to the safety of lower interest rate debt with no credit risk. Or the last few weeks of volatility will peter out, and the 10% drop in the NASDAQ we just saw will prove to be yet another of so many dip-buying opportunities, regardless of high valuations.
July 2024 Performance Review
There was a radical reversal in market leadership in July, with smaller-cap stocks climbing and larger-cap growth stocks sinking. The small-cap move was a roughly 10% jump in just a few days in July. In early August, the entire stock market dropped sharply, though it has mostly recovered. When U.S. large-cap growth stock leadership flips, we tend to do well, and we had a solid benchmark-beating month, the first in quite some time.
Our Conservative portfolio gained 2.36% in July, and our Aggressive portfolio gained 2.18%. Benchmark Vanguard funds for July 2024 were as follows: Vanguard 500 Index Fund (VFINX), up 1.21%; Vanguard Total Bond Index (VBMFX), up 2.31%; Vanguard Developed Mkts Index (VTMGX), up 3.41%; Vanguard Emerging Mkts Index (VEIEX), up 1.01%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, gained 1.89%.
The expectation is that the economy and inflation are slowing, and the Fed will soon lower rates. This boosted bonds and sent large-cap tech down sharply while small-cap stocks surged. The logic, if there is any beyond wild swings in bets, is that smaller-cap stocks need rates to come down to do well and have lagged because of it. This doesn't really explain why so many non-mega-cap stocks are not doing well earnings-wise, even though they locked in low rates years ago, but so be it. The expectation for lower rates sent the yen up after years of weakness as investors supposedly borrowed at low rates in yen and invested elsewhere for fat profits. The Bank of Japan also raised rates, further reducing this wide gap. The U.S. dollar weakened slightly. All this was good for our foreign holdings, bonds, and shorts on big-cap tech.
Japan was strong with a 4.38% return for Franklin FTSE Japan ETF (FLJP), though this has quickly unwound with recent big slides in Japanese stocks. LeatherBack L/S Alt. Yld. (LBAY) had a particularly good month shorting growth stocks and going long on more value-oriented names, delivering a 5.32% return for the month, barely beaten by ProShares UltraShort QQQ (QID) delivering a 5.41% bump as tech sank. Value was strong with Vanguard Value Index (VTV) up 5.4%. It has been rare that the majority of our funds beat the S&P 500, but July delivered. Note that the S&P 500 has beaten the majority of all fund categories for years now, not just our picks. Our only losers last month were our short Proshares Short Bitcoin (BITI), down 9.4%, a 1.37% drop in Franklin FTSE China (FLCH), and a 1.08% slide in Vanguard Communication ETF (VOX), which is large-cap tech-heavy.
Rates dropped across the board, pushing up our longer-term bond funds. Vanguard Extended Duration Treasury (EDV) jumped 4.03%, while Vangaurd L/T Treasury (VGLT) moved up 3.53%, followed by Vanguard Long-Term Bond Index ETF (BLV) up 3.39%. The only reason we're not more excited about bond performance going forward is that so much money has flowed into bonds in recent months, trying to lock in higher rates. If it starts to look like inflation isn't under control, we could see some of this hot money reverse course fast and send bonds back down again. If inflation expectations keep dropping, we could go back into inflation-adjusted bonds.
The great small-cap rally of July quickly fizzled out in August. While small-cap has lagged large-cap, it hasn't been by that much when you consider how much small-cap outperformed large-cap in the 2000s. Adjusting for slow growth, it’s debatable if there’s so much value in small-cap value relative to, say, 2000 when tech was more overpriced compared to value. It is likely that the values abroad are better than the relative U.S. value compared to growth.
For now, wild gyrations are back, with daily swings higher than we've seen in years. There are plenty of signs we've licked inflation without causing a recession, but plenty that say the recession train is still coming, just a little delayed. In recent weeks, riskier debt has stumbled, meaning bonds that do poorly in recessions because of rising default rates are starting to fall on days when safe government bonds do well—something more typical in a recession where investors flock to the safety of lower interest rate debt with no credit risk. Or the last few weeks of volatility will peter out, and the 10% drop in the NASDAQ we just saw will prove to be yet another of so many dip-buying opportunities, regardless of high valuations.