August 2024 Performance Review
The smooth ride up for US stocks seems to have ended as investors grapple with the good news of slowing inflation and likely rate decreases by the Fed, alongside the potentially bad news that the reason for inflation coming down is that the entire economy might follow it downward. Dropping rates slowly may not be enough to prevent this.
A very strong year for US stocks appeared to have ended in mid-July with a sharp drop into early August, only to be followed by an equally fast rise back to yearly highs by late August—only for much of that to evaporate in early September. Bonds have been steady gainers for the last few months as, at least, the rate environment seems predictable, even if the economy and corporate earnings growth are not. With foreign markets and bonds improving, we once again posted good returns relative to the US market and a globally balanced portfolio.
Our Conservative portfolio gained 2.34%, and our Aggressive portfolio gained 3.18%. Benchmark Vanguard funds for August 2024 were as follows: Vanguard 500 Index Fund (VFINX) up 2.42%; Vanguard Total Bond Index (VBMFX) up 1.33%; Vanguard Developed Mkts Index (VTMGX) up 2.87%; Vanguard Emerging Mkts Index (VEIEX) up 1.07%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 1.99%.
There seems to be growing confidence that rates will plunge with slowing inflation and that a safe 5% return will soon be a thing of the past. It might be. What is less clear is the future for longer-term rates. If too much money chases too few non-stock investments, we may see 2–3% long-term rates again. However, many investors lost a lot in recent years when longer-term rates climbed fast (including us), so the demand for 2% long-term bonds may not be strong anytime soon — even with falling inflation. Perhaps we’ll see a more normal steep yield curve, where short-term rates are 2% and long-term rates are 4% or higher, which could lead to losses for those buying longer-term bonds now, even though rates are still well above the lows of a few years ago.
The completely nonsensical ramblings about future fiscal policy from both candidates probably aren’t helping, unless you believe tariffs, new tax cuts, or taxing unrealized capital gains are somehow magical solutions to reducing frightening budget deficits—ideas that were tried with poor results in the 1920s here and, in the case of wealth taxes, more recently in France. The only wealth taxes that work (defined as bringing in substantial revenue) are on things that can’t be moved to another country, like homes and sometimes cars. The only tariffs that bring in significant revenue are those that aren’t reciprocated. Perhaps this is irrelevant—politicians always dodge the harsher realities of budgets. More recently, though, they seem to not care about the longer-term effects of populist policies.
In our own portfolios, we saw 2%+ returns in our bond funds (excluding the short-term cash-like fund BondBloxx Six Month Treasury ETF (XHLF)) as rates declined. iShares JP Morgan Em. Bond (LEMB) was further boosted by a falling dollar, as our future rate advantage over other countries seems less enticing to global investors.
Our Brazil fund Franklin FTSE Brazil (FLBR) rebounded sharply in August with a 7.05% return, somewhat odd given oil and commodity prices dipped, which generally is not great for a country with such a high percentage of economic activity from natural resources. Much of this was just a rebound from a sharp drop in stock prices in previous months. Latin American stocks in general had a good month, up over 4%, though, like Brazil, they are still down for the year—essentially the only weak area globally in stocks in 2024 other than China still down slightly for the year. Some of this may be attributed to Brazil’s well-above-average dividend yields in a now-falling rate environment. Other yield-heavy stocks also did well last month, including real estate stocks globally and utilities, the latter almost matching the S&P 500 this year with an 18.8% return.
The only weak areas in our portfolio, besides shorting junk bonds and Nasdaq stocks, were Franklin FTSE South Korea (FLKR), down 1.08%, and Franklin FTSE China (FLCH), which was barely up at 0.35%. Crypto was weak, so we saw gains in our inverse Crypto ETF, and our ETF that shorts lower-quality names LeatherBack L/S Alt. Yld. (LBAY) even scored a 3.11% return, while poor returns in retailers helped push ProShares Decline of Retail (EMTY) up 2.14%. We may have reached maximum rebound from the 2022 crash lows in Covid bubble stocks and crypto, which tanked in 2021–2022 only to rebound sharply through early 2024.
Stock Funds | 1mo % |
---|---|
UltraShort Bloom. Crude Oil (SCO) | 9.05% |
Franklin FTSE Brazil (FLBR) | 7.05% |
VanEck Vectors Pharma. (PPH) | 6.82% |
Proshares Short Bitcoin (BITI) | 6.78% |
Franklin FTSE Germany (FLGR) | 4.73% |
Vanguard FTSE Europe (VGK) | 3.61% |
LeatherBack L/S Alt. Yld. (LBAY) | 3.11% |
Vanguard FTSE Developed Mkts. (VEA) | 2.91% |
Vanguard Value Index (VTV) | 2.88% |
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX) | 2.87% |
[Benchmark] Vanguard 500 Index (VFINX) | 2.42% |
Invesco CurrencyShares Euro (FXE) | 2.35% |
Homestead Value Fund (HOVLX) | 2.17% |
ProShares Decline of Retail (EMTY) | 2.14% |
Vanguard Communications ETF (VOX) | 2.04% |
Vangaurd All-World Small-Cap (VSS) | 1.52% |
Franklin FTSE Japan ETF (FLJP) | 1.47% |
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX) | 1.07% |
Franklin FTSE China (FLCH) | 0.35% |
Franklin FTSE South Korea (FLKR) | -1.08% |
Proshares Short High Yld (SJB) | -1.14% |
ProShares UltraShort QQQ (QID) | -2.48% |
Bond Funds | 1mo % |
---|---|
Vanguard Extended Duration Treasury (EDV) | 2.83% |
iShares JP Morgan Em. Bond (LEMB) | 2.52% |
Vanguard Long-Term Bond Index ETF (BLV) | 2.20% |
Vangaurd L/T Treasury (VGLT) | 1.99% |
[Benchmark] Vanguard Total Bond Index (VBMFX) | 1.33% |
BondBloxx Six Month Treasury ETF (XHLF) | 0.60% |
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.
Stock Funds | 1mo % |
---|---|
ProShares UltraShort QQQ (QID) | 5.41% |
Vanguard Value Index (VTV) | 5.40% |
LeatherBack L/S Alt. Yld. (LBAY) | 5.32% |
UltraShort Bloom. Crude Oil (SCO) | 5.07% |
Franklin FTSE Japan ETF (FLJP) | 4.38% |
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX) | 3.41% |
Vangaurd All-World Small-Cap (VSS) | 3.18% |
Vanguard FTSE Developed Mkts. (VEA) | 3.02% |
Vanguard FTSE Europe (VGK) | 2.53% |
Homestead Value Fund (HOVLX) | 2.18% |
VanEck Vectors Pharma. (PPH) | 2.15% |
Franklin FTSE Germany (FLGR) | 1.65% |
Franklin FTSE Brazil (FLBR) | 1.56% |
Invesco CurrencyShares Euro (FXE) | 1.25% |
[Benchmark] Vanguard 500 Index (VFINX) | 1.21% |
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX) | 1.01% |
Franklin FTSE South Korea (FLKR) | 0.27% |
Proshares Short High Yld (SJB) | 0.14% |
ProShares Decline of Retail (EMTY) | -0.23% |
Vanguard Communications ETF (VOX) | -1.08% |
Franklin FTSE China (FLCH) | -1.37% |
Proshares Short Bitcoin (BITI) | -9.40% |
Bond Funds | 1mo % |
---|---|
Vanguard Extended Duration Treasury (EDV) | 4.03% |
Vangaurd L/T Treasury (VGLT) | 3.53% |
Vanguard Long-Term Bond Index ETF (BLV) | 3.39% |
[Benchmark] Vanguard Total Bond Index (VBMFX) | 2.31% |
iShares JP Morgan Em. Bond (LEMB) | 2.30% |
BondBloxx Six Month Treasury ETF (XHLF) | 0.48% |
June 2024 Performance Review
We may be seeing two different reactions to higher interest rates play out globally. Inflation is down, but US central bankers are still on high alert. Interest rates remain high, and bonds are down slightly for the year, though they have recently improved. US large-cap growth stocks are still white hot, while the rest of the stock market is only fair. Abroad, larger foreign markets are up less than 5% for the year after a weak June, compared to a roughly 15% return for the S&P 500 in 2024.
Our Conservative portfolio gained 0.12% in June, and our Aggressive portfolio declined 0.57%. Benchmark Vanguard funds for June 2024 were as follows: Vanguard 500 Index Fund (VFINX) up 3.58%; Vanguard Total Bond Index (VBMFX) up 0.93%; Vanguard Developed Mkts Index (VTMGX) down 1.91%; Vanguard Emerging Mkts Index (VEIEX) up 2.17%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 1.02%.
By moving into out-of-favor areas, our portfolios are positioned for a rotation from US large-cap growth stocks to bonds and smaller, more value-oriented global stocks—a market shift that hasn't happened yet, resulting in our performance lagging behind the S&P 500. Foreign stocks, including emerging markets, are still below 2021 highs, and bonds are down from 2020 highs.
There are signs parts of the real estate market are cracking under higher rates, notably commercial real estate, where sloppy high-risk lending is becoming apparent. While it is partially true that the worst aspects of the 2005 era real estate bubble—liar loans, no income no job (NINJA) loans, low down payments, excessive subprime loans—have been greatly reduced, the prime loans backing today's real estate boom may prove otherwise.
A recent article in the WSJ notes how commercial borrowers essentially lied about building revenues and expenses to get favorable loans, and lenders didn't look too closely. Many projects simply aren't going to work out at current high rates, as the income from the project can't handle higher payments. This has been a slow-moving crisis with extend and pretend arrangements, where defaults can be pushed off by not forcing borrowers' hands.
Perhaps this will devolve into the zombie loan era in Japan post-1989 twin stock and real estate bubbles, one that took decades to fully clear out of the system. The strong Japanese market (thanks to what else — chip stocks) broke the all-time intraday Nikkei 225 high set back in 1989. Can it happen here? Not likely, but it might if we lose the ability to respond to disasters either by bond investors being unwilling to buy more debt without demanding higher rates or the Fed losing the ability to create money to buy debt without causing high inflation.
Recent developments seem to reinforce US large-stock global dominance. Interest rates don't seem to be dragging on our economy much, which is astounding considering the high prices in real estate matched with now high mortgage rates. Abroad, perhaps due to weaker economic foundations, fewer long-term rate-locked mortgages, minimal AI boom, or just less deficit spending compared to the USA, currencies are weakening and the economy is sluggish. We are increasingly standing alone, except for maybe India, which has been a lone standout in strong stock market performance over much of the last decade.
Funds investing in India were up almost 7% last month, the top showing for all fund categories, and are now up over 13% for the year, the only single country fund category up double-digits this year except for the US. The gap with China and Latin American funds is astounding over the last 5 years—double-digit annual returns vs. negative returns. Part of this is political risk, but much of it is what happens to hot markets. About 15 years ago, China and Latin America were the hot areas to invest with scorching hot returns over the early 2000s until they crashed hard. This should be a warning to investors in large-cap tech stocks now, as well as in India. There is no way to know when the reversal of stock market fortunes will happen, but it is usually close to when money starts flowing out of poorly performing areas into hot markets and a bigger performance gap appears between the hot and not areas.
Utilities took a dive last month, offering a possible re-entry point. The bubble in energy-intensive AI, on top of energy-intensive crypto mining, ongoing shifts to electricity-guzzling EVs, and higher temperatures seem to offer good fundamentals for energy consumption for the foreseeable future.
In our own portfolios, the only strong areas were shorting bitcoin and retailers and our stake in Franklin FTSE South Korea (FLKR), which was having a bad year until last month. Our other single country funds performed poorly, down between 3 and 5% for the month, much of this due to currency weakness. This is why Invesco CurrencyShares Euro (FXE) was down 1.13% and iShares JP Morgan Em. Bond (LEMB) was down 1.16%, even though lower rates pushed Vanguard Extended Duration Treasury (EDV) up 2.5%, clawing back losses for the year.
Somewhat wild swings in interest rates recently and steady tech stock booming could mean a rough late 2024.
Stock Funds | 1mo % |
---|---|
Proshares Short Bitcoin (BITI) | 12.51% |
Franklin FTSE South Korea (FLKR) | 6.32% |
ProShares Decline of Retail (EMTY) | 4.27% |
[Benchmark] Vanguard 500 Index (VFINX) | 3.58% |
Vanguard Communications ETF (VOX) | 3.08% |
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX) | 2.17% |
VanEck Vectors Pharma. (PPH) | 1.13% |
Homestead Value Fund (HOVLX) | 0.09% |
Vanguard Value Index (VTV) | -0.48% |
Franklin FTSE Japan ETF (FLJP) | -0.72% |
Invesco CurrencyShares Euro (FXE) | -1.13% |
Vangaurd All-World Small-Cap (VSS) | -1.25% |
Vanguard FTSE Developed Mkts. (VEA) | -1.66% |
Proshares Short High Yld (SJB) | -1.80% |
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX) | -1.91% |
Vanguard FTSE Europe (VGK) | -2.94% |
LeatherBack L/S Alt. Yld. (LBAY) | -3.25% |
Franklin FTSE China (FLCH) | -3.29% |
Franklin FTSE Germany (FLGR) | -4.69% |
Franklin FTSE Brazil (FLBR) | -4.87% |
UltraShort Bloom. Crude Oil (SCO) | -8.25% |
ProShares UltraShort QQQ (QID) | -12.53% |
Bond Funds | 1mo % |
---|---|
Vanguard Extended Duration Treasury (EDV) | 2.50% |
Vangaurd L/T Treasury (VGLT) | 1.65% |
[Benchmark] Vanguard Total Bond Index (VBMFX) | 0.93% |
Vanguard Long-Term Bond Index ETF (BLV) | 0.90% |
BondBloxx Six Month Treasury ETF (XHLF) | 0.42% |
iShares JP Morgan Em. Bond (LEMB) | -1.16% |
May 2024 Performance Review
The seesaw continued with most of what was weak in April rebounding in May. The economy and inflation seem to be cooling at a safe pace. Rising speculation in crypto and meme stocks didn’t seem to alarm investors even though it could mean the Fed is going to keep burning money a bit longer. Foreign markets are starting to participate more when US stocks go up, though in general, the economic situation in Europe isn’t impressive.
The S&P 500 is up about twice as much as foreign stocks this year with an over 11% return after May's rebound. Most of the world does not do 30-year fixed-rate mortgages, so it is likely rising rates will start dragging on other economies sooner than the US.
Our Conservative portfolio gained 2.83%, and our Aggressive portfolio gained 2.75%. Benchmark Vanguard funds for May 2024 were as follows: Vanguard 500 Index Fund (VFINX), up 4.95%; Vanguard Total Bond Index (VBMFX), up 1.70%; Vanguard Developed Mkts Index (VTMGX), up 4.76%; Vanguard Emerging Mkts Index (VEIEX), up 1.94%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 3.43%.
Our best holding was Vanguard FTSE Europe (VGK) up 6.45%, followed by tech-heavy Vanguard Communication ETF (VOX) up 6.4%. Europe somehow beat the S&P 500 for the first time in quite a while during a strong month for stocks, helped by a tailwind of a rising Euro.
Falling oil boosted our oil short, but all other shorts were weak, notably our inverse Bitcoin stake as "stupid gold" cranked back up and gamblers dove back into meme stocks and other near-guaranteed long-term losers. Our long-short LeatherBack L/S Alt. Yld. (LBAY) performed well with a 2.68% return considering many junk stocks were on the move up and value stocks in general lagged growth. The fund may still have a larg(ish) short position in DoorDash [DASH] which slid pretty hard in May.
You have to wonder if Roaring Kitty—the GameStop manipulator and YOLO hero of the anti-hedge fund little guy who appears to have amassed some quarter billion dollars plus worth of his favorite dead-end stock—will single-handedly tip the scales in favor of 'higher for longer' rates as the Fed sees speculative bubbles that need addressing and could cause a global real estate collapse 2.0. The odds aren't zero. Maybe this time around he'll get his fans to actually buy more at GameStop locations (instead of downloading games) because merely buying the stock is only delaying the inevitable.
Brazil is having a rough year partially due to weakish commodity prices and more recently tragic flooding that will weigh on the economy. Franklin FTSE Brazil (FLBR) fell 4.01% last month, while China continued to rebound with a 4.48% jump for Franklin FTSE China (FLCH).
Bonds were strong but not strong enough to turn positive for the year. Vanguard Extended Duration Treasury (EDV) rebounded almost 4% last month compared to the total bond index return of 1.7%.
Inflation seems to be moderating, but there are many shifts going on that could maintain well above 2% inflation for longer than expected. Rising real estate prices both boost costs with rents as well as lead to wealth-effect spending by those with twin gains from stocks and their homes. Retired boomers are so far not spending down the equity as inflation fears and probably hits to bonds have scared many into more modest spending habits than the historical high levels of wealth would indicate.
Increasing tariffs on lower-priced goods from China while simultaneously subsidizing purchases, all while running recession-grade deficits, is ridiculous on multiple fronts. In addition, we're effectively cutting the federal gas tax every year as it doesn’t go up with inflation and is currently sitting at early 1990s levels of $0.18, which used to be almost 20% of the pump price when gas was around a dollar but is now around 5%. It would have been so much easier economically (though not politically) to reduce inflation and lead to EV car adoption by just scrapping the huge credits to buy pricey EVs and cranking up fuel taxes. This would also have reduced our yearly deficit. Moreover, the hit to global energy prices from such tax increases would have done more to slow Russia's financing of military adventures than half-baked sanctions and would be less risky than trying to figure out which of our weapons can be used by Ukraine against Russia without triggering Putin.
As we're not going to tighten any belts in America, no matter how high inflation or how important getting our finances in order for the next calamity is, it is possible we'll be back into energy funds again soon.
Stock Funds | 1mo % |
---|---|
Vanguard FTSE Europe (VGK) | 6.45% |
Vanguard Communications ETF (VOX) | 6.40% |
UltraShort Bloom. Crude Oil (SCO) | 6.00% |
Franklin FTSE Germany (FLGR) | 5.05% |
[Benchmark] Vanguard 500 Index (VFINX) | 4.95% |
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX) | 4.76% |
Vanguard FTSE Developed Mkts. (VEA) | 4.66% |
Vangaurd All-World Small-Cap (VSS) | 4.56% |
Franklin FTSE China (FLCH) | 4.48% |
VanEck Vectors Pharma. (PPH) | 3.31% |
Vanguard Value Index (VTV) | 3.00% |
LeatherBack L/S Alt. Yld. (LBAY) | 2.68% |
Franklin FTSE Japan ETF (FLJP) | 2.42% |
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX) | 1.94% |
Homestead Value Fund (HOVLX) | 1.88% |
Invesco CurrencyShares Euro (FXE) | 1.87% |
Proshares Short High Yld (SJB) | -0.58% |
Franklin FTSE South Korea (FLKR) | -1.03% |
Franklin FTSE Brazil (FLBR) | -4.01% |
ProShares UltraShort QQQ (QID) | -10.86% |
ProShares Decline of Retail (EMTY) | -11.94% |
Proshares Short Bitcoin (BITI) | -13.72% |
Bond Funds | 1mo % |
---|---|
Vanguard Extended Duration Treasury (EDV) | 3.96% |
Vanguard Long-Term Bond Index ETF (BLV) | 2.97% |
Vangaurd L/T Treasury (VGLT) | 2.83% |
iShares JP Morgan Em. Bond (LEMB) | 1.89% |
[Benchmark] Vanguard Total Bond Index (VBMFX) | 1.70% |
BondBloxx Six Month Treasury ETF (XHLF) | 0.47% |
April 2024 Performance Review
In April 2024 the financial markets experienced heightened volatility due to an increase in interest rates, which impacted bond prices. Our Conservative portfolio declined by 3.86%, while our Aggressive portfolio fell 3.06%.
Benchmark Vanguard funds for April 2024: Vanguard 500 Index Fund (VFINX) was down 4.09%, Vanguard Total Bond Index (VBMFX) declined 2.44%, Vanguard Developed Mkts Index (VTMGX) decreased by 3.35%, and Vanguard Emerging Mkts Index (VEIEX) posted a modest gain of 1.02%. Vanguard Star Fund (VGSTX), a global balanced portfolio, was down 3.38%.
Our longer-term bonds were the primary driver of our Conservative portfolio underperforming Vanguard's roughly 60% stocks/40% bonds portfolio. The main upside last quarter was shorting and funds with stocks in China, explaining how our Aggressive portfolio had less downside than our Conservative portfolio in a down month.
Proshares Short Bitcoin (BITI) surged 18.79%, benefiting from Bitcoin's significant price drop as the post-ETF launching craze flattens out. ProShares Decline of Retail (EMTY) rose 13.06% as consumer spending weakened amidst sticky inflation. Franklin FTSE China (FLCH) gained 4.63% due to China's improved economic performance and strong industrial output, plus months of poor performance turning around in February of this year.
Franklin FTSE South Korea (FLKR) dropped 6.33%, impacted by regional geopolitical tensions involving North Korea and China. FLJP fell 5.61% amid Japan's sluggish economic recovery. Franklin FTSE Brazil (FLBR) decreased by 4.20%, adding to a poor 2024. Vanguard Communication ETF (VOX) was down 3.98%, mainly due to poor performance in tech-heavy stocks pressured by rising interest rates. Communications funds are no longer just Verizon-type companies but contain around 50% mega-cap tech stocks like Meta (Facebook) and Alphabet (Google).
BondBloxx Six Month Treasury ETF (XHLF) slightly increased by 0.34%, as short-term bonds don't go up or down much with rising rates. On the other end of the yield curve, Vanguard Extended Duration Treasury (EDV) fell 9.12%, heavily hit by rising long-term interest rates affecting long-duration bonds.
In April 2024, some of the hottest areas in an otherwise down market were funds focusing on precious metals. These surged nearly 5% as gold and silver continued to do well on inflation worries and foreign central bank buying, and doom and gloomier fears over the collapse of money because of rising government deficits. Gold is "boomer bitcoin."
Strangely, Bitcoin had a terrible month even though both it at gold trade are attractive to anxious investors.
Chinese stock funds rose over 4%. Commodities funds, including oil and metals, gained around 3%, benefiting from resilient prices and a not slowing much U.S. economy. Indian equity funds increased over 2%, continuing a strong run as essentially the best performing foreign market over the last decade and the only country with near U.S. stock market returns over this longer period. On the downside last month, digital asset funds plummeted 20%. Real estate funds fell almost 7% because of rising interest rates. Small-cap growth, health, and mid-cap growth funds also faced declines in the high-interest-rate environment, dropping around 6% to 7%.
The economy and markets are still trying to thread the needle of reducing inflation without causing a recession. So far, so good. But it always is until it isn't.
Stock Funds | 1mo % |
---|---|
Proshares Short Bitcoin (BITI) | 18.79% |
ProShares Decline of Retail (EMTY) | 13.06% |
ProShares UltraShort QQQ (QID) | 7.83% |
Franklin FTSE China (FLCH) | 4.63% |
Proshares Short High Yld (SJB) | 1.46% |
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX) | 1.02% |
UltraShort Bloom. Crude Oil (SCO) | -0.06% |
Invesco CurrencyShares Euro (FXE) | -0.88% |
Vangaurd All-World Small-Cap (VSS) | -1.92% |
Vanguard FTSE Europe (VGK) | -2.55% |
VanEck Vectors Pharma. (PPH) | -2.88% |
LeatherBack L/S Alt. Yld. (LBAY) | -3.24% |
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX) | -3.35% |
Vanguard FTSE Developed Mkts. (VEA) | -3.41% |
Vanguard Value Index (VTV) | -3.91% |
Franklin FTSE Germany (FLGR) | -3.93% |
Vanguard Communications ETF (VOX) | -3.98% |
Homestead Value Fund (HOVLX) | -4.07% |
[Benchmark] Vanguard 500 Index (VFINX) | -4.09% |
Franklin FTSE Brazil (FLBR) | -4.20% |
Franklin FTSE Japan ETF (FLJP) | -5.61% |
Franklin FTSE South Korea (FLKR) | -6.33% |
Bond Funds | 1mo % |
---|---|
BondBloxx Six Month Treasury ETF (XHLF) | 0.34% |
iShares JP Morgan Em. Bond (LEMB) | -1.90% |
[Benchmark] Vanguard Total Bond Index (VBMFX) | -2.44% |
Vanguard Long-Term Bond Index ETF (BLV) | -5.38% |
Vangaurd L/T Treasury (VGLT) | -5.89% |
Vanguard Extended Duration Treasury (EDV) | -9.12% |
March 2024 Performance Review
March deviated from the norm with the S&P 500 index not beating 90% of fund returns — it was more in the middle of all stock fund categories with a still respectable 3.22% gain. It seems the longstanding outperformance of the top growth stocks may be waning. Bonds had a moderate showing, though recently, rising inflation fears have caused rates to spike, driving most bond funds down for the year.
Our Conservative portfolio gained 2.18%, and our Aggressive portfolio saw a 1.91% increase in March. Benchmark Vanguard funds for March 2024 were as follows: Vanguard 500 Index Fund (VFINX), up 3.21%; Vanguard Total Bond Index (VBMFX), up 0.82%; Vanguard Developed Mkts Index (VTMGX), up 3.53%; Vanguard Emerging Mkts Index (VEIEX), up 1.57%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 2.41%.
The broader global market performance has bolstered our results, but troubling signs are emerging, primarily in the bond market. It’s been a volatile year for bonds, dipping to near 2022 lows in early April. Long-term government bond funds are now down about 10% for the year, following a 3% return in 2023 and a harsh 30%+ decline in 2022. Since the peak in 2022, longer-term bonds and bond funds have dropped nearly 50% from their high. Surprisingly, investment in bonds continues as investors rush to secure higher rates before a potential Federal Reserve rate drop.
Inflation has persisted longer than investors and the Federal Reserve had hoped. Commodities are surging, and interest rate hikes haven't quelled the housing market. Notably, investors are gravitating back towards speculative assets, from cryptocurrencies to high-risk growth stocks without earnings — sectors that plummeted after the Covid-related bubbles.
Recently, larger tech stocks have faltered, with Tesla [TSLA] down approximately 30% for the year after recovering from the last significant drop. Even the formidable Apple [AAPL] has seen declines this year. These stocks are influential in most indices. Some downward pressure comes from the ongoing debate over China, but there's also the potential for stricter global antitrust regulations that could hamper the aggressive business practices of market leaders.
Renewed inflation concerns drove precious metals funds up nearly 20% last month, outperforming even hot crypto-related funds. It's notable that the 15-year return on precious metals funds averages nearly zero, with the 10-year returns barely outpacing inflation.
Energy also surged as rising oil prices signal a robust economy that seems indifferent to rate changes or even a sluggish global economy.
In our own portfolios, we've seen some unexpected winners. Vanguard Value Index (VTV) was up 5.17% as investors seem to be embracing value once more. Our previously underperforming LeatherBack L/S Alt. Yld. (LBAY) leapt 4.73% as shorting popular stocks like Tesla began to yield results. This fund last performed well when lesser-quality stocks declined, but it's been lackluster during the resurgence of speculation. Vanguard Market Neutral (VMNFX), a fund we use in some client accounts, has adopted a more rewarding strategy of long positions in solid stocks versus shorting speculative ones, although this fund struggled during the speculative frenzy of the Covid era.
Most of our funds that focused on international markets outperformed the US market, except Franklin FTSE Brazil (FLBR), which was down 1.29%. Considering the relative weakness of the global economy compared to the US, this is a favorable outcome for us. The strengthening US dollar, bolstered by high rates compared to likely rate cuts abroad, has weighed on iShares JP Morgan Em. Bond (LEMB), down 0.26% last month.
Rising rates aren’t just bad for bonds. If long-term rates go back up over 5% and mortgages hit over 8%, we probably won’t see stocks hold up. The recent stock rally was built on hopes that inflation and rates would drop while the economy stayed solid.
Stock Funds | 1mo % |
---|---|
Vanguard Value Index (VTV) | 5.17% |
LeatherBack L/S Alt. Yld. (LBAY) | 4.73% |
Franklin FTSE South Korea (FLKR) | 4.59% |
Homestead Value Fund (HOVLX) | 4.50% |
Franklin FTSE Germany (FLGR) | 4.31% |
Vanguard FTSE Europe (VGK) | 3.82% |
Vanguard FTSE Developed Mkts. (VEA) | 3.65% |
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX) | 3.53% |
Franklin FTSE Japan ETF (FLJP) | 3.40% |
Vangaurd All-World Small-Cap (VSS) | 3.23% |
[Benchmark] Vanguard 500 Index (VFINX) | 3.21% |
Vanguard Communications ETF (VOX) | 2.84% |
VanEck Vectors Pharma. (PPH) | 2.14% |
Franklin FTSE China (FLCH) | 2.07% |
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX) | 1.57% |
Invesco CurrencyShares Euro (FXE) | 0.03% |
Proshares Short High Yld (SJB) | -0.43% |
ProShares Decline of Retail (EMTY) | -0.97% |
Franklin FTSE Brazil (FLBR) | -1.29% |
ProShares UltraShort QQQ (QID) | -1.95% |
UltraShort Bloom. Crude Oil (SCO) | -11.39% |
Proshares Short Bitcoin (BITI) | -15.05% |
Bond Funds | 1mo % |
---|---|
Vanguard Long-Term Bond Index ETF (BLV) | 1.45% |
Vanguard Extended Duration Treasury (EDV) | 1.11% |
Vangaurd L/T Treasury (VGLT) | 0.98% |
[Benchmark] Vanguard Total Bond Index (VBMFX) | 0.82% |
BondBloxx Six Month Treasury ETF (XHLF) | 0.38% |
iShares JP Morgan Em. Bond (LEMB) | -0.26% |
February 2024 Performance Review
The market booked another strong month for U.S. stocks. The only foreign market that outperformed the U.S. in February was China which rebounded nearly 10%. Interest rates drifted back up, sending bonds down. Our globally balanced portfolio was up but lagged behind U.S. stocks by a wide margin, as a handful of growth stocks continued to drive returns. Year to date the S&P 500 is up just over 7%, foreign markets as a whole are only up around 1%, and the U.S. bond market is down 1.6%.
Our Conservative portfolio gained 1.05%, and our Aggressive portfolio gained 1.65% in February. Benchmark Vanguard funds for February 2024 were as follows: Vanguard 500 Index Fund (VFINX), up 5.34%; Vanguard Total Bond Index (VBMFX), down 1.39%; Vanguard Developed Mkts Index (VTMGX), up 2.83%; Vanguard Emerging Mkts Index (VEIEX), up 3.98%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 2.43%.
Our strong areas relative to the hot U.S. market last month were Franklin FTSE South Korea (FLKR) and Franklin FTSE China (FLCH), up 8.13% and 6.62% respectively, with a good showing in Homestead Value Fund (HOVLX) and Franklin FTSE Germany (FLGR). Most of our foreign stock funds were a relative drag, and it's better not to even ask about shorting Bitcoin as the crypto bubble flares up again.
Rates drifted back up, sending our three longer-term bond funds down over 2%. Inflation is going in the right direction, but with a mini trade war with China, sky-high real estate prices, and questionable work-at-home productivity, alongside ongoing massive deficit spending, it is unclear if we'll see stable low inflation without higher rates. Worse, it appears low rates could lead to an even bigger asset bubble than we had a couple of years ago before rates went up.
Stock Funds | 1mo % |
---|---|
Franklin FTSE South Korea (FLKR) | 8.13% |
Franklin FTSE China (FLCH) | 6.62% |
Homestead Value Fund (HOVLX) | 6.13% |
Franklin FTSE Germany (FLGR) | 5.41% |
[Benchmark] Vanguard 500 Index (VFINX) | 5.34% |
Vanguard Communications ETF (VOX) | 4.58% |
Franklin FTSE Japan ETF (FLJP) | 4.17% |
VanEck Vectors Pharma. (PPH) | 4.10% |
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX) | 3.98% |
Vanguard Value Index (VTV) | 3.34% |
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX) | 2.83% |
Vanguard FTSE Developed Mkts. (VEA) | 2.74% |
Vanguard FTSE Europe (VGK) | 2.40% |
Vangaurd All-World Small-Cap (VSS) | 1.57% |
LeatherBack L/S Alt. Yld. (LBAY) | 1.04% |
Franklin FTSE Brazil (FLBR) | 0.34% |
Proshares Short High Yld (SJB) | 0.29% |
Invesco CurrencyShares Euro (FXE) | 0.18% |
UltraShort Bloom. Crude Oil (SCO) | -3.83% |
ProShares Decline of Retail (EMTY) | -8.08% |
ProShares UltraShort QQQ (QID) | -9.44% |
Proshares Short Bitcoin (BITI) | -31.93% |
Bond Funds | 1mo % |
---|---|
iShares JP Morgan Em. Bond (LEMB) | 0.36% |
BondBloxx Six Month Treasury ETF (XHLF) | 0.36% |
[Benchmark] Vanguard Total Bond Index (VBMFX) | -1.39% |
Vangaurd L/T Treasury (VGLT) | -2.32% |
Vanguard Long-Term Bond Index ETF (BLV) | -2.37% |
Vanguard Extended Duration Treasury (EDV) | -2.62% |
January 2024 Performance Review
December's significant returns for stocks and bonds largely fizzled out in January, at least for non-US stocks. There were some bright spots, like Japan, but most foreign markets and bonds were down. An allocation to still-sinking China more than offset our gains in Japan, and longer-term bond funds were down more than the bond index, resulting in negative numbers.
Our Conservative portfolio declined by 1.76%, and our Aggressive portfolio by 0.90%. Benchmark Vanguard funds for January 2024 were as follows: Vanguard 500 Index Fund (VFINX), up 1.68%; Vanguard Total Bond Index (VBMFX), down 0.24%; Vanguard Developed Mkts Index (VTMGX), down 1.23%; Vanguard Emerging Mkts Index (VEIEX), down 3.53%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, down 0.26%.
Only around 5% of all fund categories outperformed the S&P 500 last month (and not by much), as large-cap growth stocks in the US continued to deliver all the significant gains worldwide. Only our Vanguard Communication ETF (VOX) holding benefited from booming tech stocks, with a 3.9% return for the month. Our best holding was VanEck Vectors Pharma. (PPH), up 5.23% — a large gain for a relatively low-risk sector. Investors are excited about high-profit medications dealing with obesity and the near-limitless growth such advancements seem to predict. In some ways, obesity medications are the AI chips of healthcare.
Japan has been on a strong performance streak after decades of essentially going nowhere, helping our Franklin FTSE Japan ETF (FLJP) holding climb 2.93%, not enough to make up for significant losses in Franklin FTSE China (FLCH) down almost 10%. Japan has been so hot that their stock index is about to break the highs hit in 1989. That’s right, when you invest at the top of a bubble, it may take 35 years to break the old highs. Unlike with our own example in 1929, where high dividends led to an acceptable return even though the index took more than 20 years to break the old highs. In Japan, dividends were scarce as P/Es were to the moon in 1989, so total returns have been poor. With falling consumer prices for decades, the inflation-adjusted returns in Japan were less disastrous.
Interest rates drifted back up as ongoing fears over inflation and the Fed's near-future response weighed on bonds. Our long-term bond funds were down more than the bond index, with Vanguard Long-Term Bond Index ETF (BLV) down 1.37%, Vangaurd L/T Treasury (VGLT) down 1.79%, and Vanguard Extended Duration Treasury (EDV) taking a big near 4% hit, but these numbers were all after sharply strong year-end figures as rates fell with falling inflation in late 2023. iShares JP Morgan Em. Bond (LEMB) dipped 1.85%, but this was more due to currency fluctuations, perhaps related to general fears of emerging markets, of which China is the largest component both in the indexes and in actual economic activity.
With all the positivity in US markets, investors may have missed signs that large regional banks are still having problems, with drops in stocks that make the recovery since the FDIC bailouts and seizures of early 2023 seem premature. Banks are making nice interest rate spreads now, borrowing at near zero from branch depositors and lending at over 5%, but previous low-rate loans, especially to troubled commercial real estate developers, may overwhelm the otherwise benefits of a strong economy.
Stock Funds | 1mo % |
---|---|
[Benchmark] Vanguard 500 Index (VFINX) | 1.68% |
Homestead Value Fund (HOVLX) | 1.29% |
Vanguard Value Index (VTV) | 0.87% |
Proshares Short High Yld (SJB) | 0.29% |
LeatherBack L/S Alt. Yld. (LBAY) | -0.38% |
Vanguard FTSE Developed Mkts. (VEA) | -1.09% |
Vanguard FTSE Europe (VGK) | -1.23% |
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX) | -1.23% |
Invesco CurrencyShares Euro (FXE) | -1.92% |
Franklin FTSE Germany (FLGR) | -2.00% |
Proshares Short Bitcoin (BITI) | -2.43% |
Vangaurd All-World Small-Cap (VSS) | -3.13% |
ProShares UltraShort QQQ (QID) | -3.20% |
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX) | -3.53% |
Franklin FTSE Brazil (FLBR) | -5.56% |
Franklin FTSE South Korea (FLKR) | -8.90% |
Franklin FTSE China (FLCH) | -9.66% |
UltraShort Bloom. Crude Oil (SCO) | -10.00% |
Bond Funds | 1mo % |
---|---|
BondBloxx Six Month Treasury ETF (XHLF) | 0.80% |
[Benchmark] Vanguard Total Bond Index (VBMFX) | -0.24% |
Vanguard Long-Term Bond Index ETF (BLV) | -1.37% |
Vangaurd L/T Treasury (VGLT) | -1.79% |
iShares JP Morgan Em. Bond (LEMB) | -1.85% |
Vanguard Extended Duration Treasury (EDV) | -3.99% |
2023 Performance Review
The year began with several major bank collapses, necessitating FDIC intervention to ensure depositors for amounts well beyond the official $250,000 maximum. This action was crucial to prevent further bank runs. Subsequently, long-term interest rates soared, surpassing the highs of 2022 — a year of record setting losses for bonds. This spike in rates jeopardized the economy, real estate, and stock markets. However, towards year-end, falling inflation, a surprisingly robust economy, and expectations of reduced short-term rates led to a dramatic decrease in long-term rates and a significant stock market rally, especially in speculative sectors that suffered in 2022.
Overall, the bond market closed the year with slight gains, reversing what appeared to be another year of double-digit losses for long-term bonds. U.S. stocks experienced one of their best years, with the S&P 500 returning over 26%. Conservative strategies focusing on bonds and lower-risk stock funds underperformed, achieving less than half of the stock market's substantial gains. In December, our Conservative portfolio outperformed the robust S&P 500, while our Aggressive portfolio essentially matched it, benefitting from the bond rebound. However, the underweighting in U.S. stocks resulted in relatively modest annual returns of approximately 8% and 9.5% for our Conservative and Aggressive portfolios, respectively.
In December our Conservative portfolio gained 5.28%, and our Aggressive portfolio gained 4.43%. Benchmark Vanguard funds for December 2023 were as follows: Vanguard 500 Index Fund (VFINX), up 4.54%; Vanguard Total Bond Index (VBMFX), up 3.69%; Vanguard Developed Mkts Index (VTMGX), up 5.70%; Vanguard Emerging Mkts Index (VEIEX), up 3.29%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 5.07%.
We expected near 8% mortgage rates and rapidly rising corporate and consumer borrowing costs would strain the economy and stock market. This prediction, too commonplace, did not materialize, as is often the case with too-popular predictions. The Federal Reserve may have mitigated Covid stimulus inflation without causing a larger crisis, deserving some credit for this outcome.
For 2023, our primary underperformers were investments in China, bonds, and short positions. We regret not purchasing more long-term bonds during the drop in bond prices and spike in yields, although yields did not reach our anticipated 5%+ on 10-year bonds. Many investors sought to lock in near 5% rates before expected Federal Reserve rate cuts, bringing into question if rates really have peaked. Currently, shorter-term and inflation-adjusted bonds, along with foreign bonds, present more attractive opportunities, particularly if U.S. rates continue to decline and the dollar weakens.
Our China ETF Franklin FTSE China (FLCH) was the weakest stock fund in our portfolio, down approximately 2% in December and 11.1% for the year. It was our only fund to post a yearly loss without involving short positions. Chinese stocks, being a significant component of emerging market funds, largely influenced the modest single digit returns of these indexes in 2023, despite stronger performances in other markets. China's economic challenges, including a faltering real estate market and trade tensions with the U.S., remain concerns. U.S. policies under Biden, maintaining Trump-era tariffs and focusing on domestic spending in infrastructure and environmental initiatives, complicate the trade dynamics. These protectionist measures may counteract efforts to control inflation, as China has been a key factor in keeping inflation low in the U.S. since the early 2000s.
Political risks in China, including the government's increasing control over tech companies, are also significant. These developments may make Chinese tech stocks, already discounted due to government intervention, more appealing than high-valuation U.S. tech giants, which might face similar regulatory scrutiny.
Other areas of modest performance in 2023 included value stocks and traditionally safer sectors like pharmaceuticals. Our long-term holding in Homestead Value Fund (HOVLX) yielded a 12.86% return, while VanEck Vectors Pharma. (PPH) returned a modest 6.53%. With the market's shift back to growth stocks, we are considering increasing our value stock holdings and possibly divesting from the high performing Vanguard Communication ETF (VOX). Utilities, the only other negative stock fund category besides China funds, may also see a resurgence in our portfolio. While commodities were down, natural resource funds that own stocks in these sectors were up by around 7%.
Our short positions universally declined. Notably, the small ETF LeatherBack L/S Alt. Yld. (LBAY), which had a strategy of owning value-oriented stocks while shorting overpriced growth stocks, fell 8.53% for the year, after a solid 2021 and 2022 with roughly 22% returns in each of those years when trendy growth stocks sunk hard. This result was due to the modest performance of value stocks compared to the substantial gains of speculative growth stocks in 2023.
Reflecting on 2023, it's crucial to remember the year's significant bank failures, a disaster averted by government intervention. This action protected the banking system by insuring deposits well above the FDIC limit. The relatively inexpensive bailout, funded by future bank earnings and higher insurance fees, was a necessary measure to prevent a grimmer scenario. It is unclear why it was necessary to bail out billion-dollar uninsured deposits that would have experienced some losses to stop a bank run spreading when these investors could have taken some losses and FDIC could have increased support for other banks that didn't collapse to prevent more bank runs and minimize the hit to the FDIC insurance fund. This government support also raises questions about risk-taking in the financial sector. The recent inflation and interest rate hikes may signal limits to future government intervention. We hope the emerging real estate and crypto bubbles can dissipate without requiring significant government action or the rebound train might not come in on time again.
Stock Funds | 1mo % |
---|---|
UltraShort Bloom. Crude Oil (SCO) | 7.02% |
Franklin FTSE South Korea (FLKR) | 6.68% |
Franklin FTSE Brazil (FLBR) | 6.46% |
Vangaurd All-World Small-Cap (VSS) | 6.02% |
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX) | 5.70% |
Vanguard FTSE Developed Mkts. (VEA) | 5.56% |
Vanguard Communications ETF (VOX) | 5.47% |
Homestead Value Fund (HOVLX) | 5.39% |
Vanguard FTSE Europe (VGK) | 5.39% |
Vanguard Value Index (VTV) | 5.07% |
[Benchmark] Vanguard 500 Index (VFINX) | 4.54% |
Franklin FTSE Germany (FLGR) | 4.36% |
Franklin FTSE Japan ETF (FLJP) | 3.73% |
VanEck Vectors Pharma. (PPH) | 3.64% |
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX) | 3.29% |
LeatherBack L/S Alt. Yld. (LBAY) | 1.70% |
Invesco CurrencyShares Euro (FXE) | 1.61% |
Franklin FTSE China (FLCH) | -2.02% |
Proshares Short High Yld (SJB) | -2.59% |
ProShares UltraShort QQQ (QID) | -9.63% |
ProShares Decline of Retail (EMTY) | -10.39% |
Proshares Short Bitcoin (BITI) | -10.67% |
Bond Funds | 1mo % |
---|---|
Vanguard Extended Duration Treasury (EDV) | 12.50% |
Vangaurd L/T Treasury (VGLT) | 8.20% |
Vanguard Long-Term Bond Index ETF (BLV) | 7.56% |
[Benchmark] Vanguard Total Bond Index (VBMFX) | 3.69% |
iShares JP Morgan Em. Bond (LEMB) | 3.29% |
BondBloxx Six Month Treasury ETF (XHLF) | 0.08% |
November 2023 Performance Review
November was a month for the record books. The bond market abruptly reversed course as investors collectively decided that 5% on a ten-year government bond was about as high as we're going to see. With inflation continuing to decline to normal levels and all the money in cash looking to lock in higher rates for longer, investors engaged in an "everything everywhere all at once" rally in global investments. We never even hit 5% in October before rates plunged, sending bonds and everything else up in November.
Our Conservative portfolio gained 7.60%, and our Aggressive portfolio gained 6.93%. Benchmark Vanguard funds for November 2023 were as follows: Vanguard 500 Index Fund (VFINX), up 9.13%; Vanguard Total Bond Index (VBMFX), up 4.50%; Vanguard Developed Mkts Index (VTMGX), up 9.01%; Vanguard Emerging Mkts Index (VEIEX), up 6.76%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 8.27%.
While the Federal Reserve appears to have stopped raising short-term interest rates, longer-term rates were heading higher, leading to another bad year for the bond market. With inflation heading back to the Fed's target rate of 2%, it seems that rates, both short and long-term, won't go higher and may go lower, making all sorts of expensive assets seem less expensive. The hardest-hit rate-sensitive areas rebounded sharply.
While the bond index was up 4.5% last month, funds that owned longer-term bonds had one of the biggest moves up in history. Our rate-sensitive ETFs, Vanguard Extended Duration Treasury (EDV), Vanguard Long-Term Bond Index ETF (BLV), and Vangaurd L/T Treasury (VGLT), were up 14.03%, 9.97%, and 9.1% respectively, beating almost all of our stock funds. On the stock side (not including short funds), only China lagged with Franklin FTSE China (FLCH) up just 2.08%. Franklin FTSE Germany (FLGR) was up 12.78%, Franklin FTSE Brazil (FLBR) 14.44%, and Franklin FTSE South Korea (FLKR) 15%. Much of the big moves was in funds that have above-average dividend yields as investors rapidly decided it was time to lock in higher yields in case rates went back down. There seemed to be little concern that if rates go back down, we might be in a recession and stocks and higher-risk debt could slide. Utilities had a good month but are still down for the year, as are long-term bond funds.
We didn't just see big gains in higher-yield options – Cryptocurrencies and questionable growth stocks that crashed in 2022 continued on their big rebound year. All this euphoria may make the Feds stick with higher rates for longer. The Fed won't say it directly, but it is likely that rising house prices and crypto speculation are reasons not to lower rates.
Home prices are around 20% higher than the very peak in the 2007 era bubble, even adjusting for high inflation. One reason for inflation subduing may be that home ownership is consuming ever more of the household budget. Either way, the Fed doesn't want to create an even larger speculative bubble that could crash because rates followed inflation down. In this way, the return to risk-taking could risk the economy as it is easier to damage the real economy with high rates than speculation.
While the Fed is probably wary of repeating the 1929 mistake of using rates to slow speculation when inflation is tame, that doesn't mean the Fed is okay with home prices going up another 20% from here, much less seeing crypto and speculative stocks booming again.
Stock Funds | 1mo % |
---|---|
Franklin FTSE South Korea (FLKR) | 15.00% |
Franklin FTSE Brazil (FLBR) | 14.44% |
Franklin FTSE Germany (FLGR) | 12.78% |
Vanguard FTSE Europe (VGK) | 9.76% |
Vangaurd All-World Small-Cap (VSS) | 9.37% |
[Benchmark] Vanguard 500 Index (VFINX) | 9.13% |
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX) | 9.01% |
Vanguard FTSE Developed Mkts. (VEA) | 8.81% |
UltraShort Bloom. Crude Oil (SCO) | 8.75% |
Vanguard Communications ETF (VOX) | 8.09% |
Homestead Value Fund (HOVLX) | 7.60% |
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX) | 6.76% |
Vanguard Value Index (VTV) | 6.68% |
Franklin FTSE Japan ETF (FLJP) | 6.03% |
VanEck Vectors Pharma. (PPH) | 4.25% |
LeatherBack L/S Alt. Yld. (LBAY) | 3.18% |
Invesco CurrencyShares Euro (FXE) | 3.08% |
Franklin FTSE China (FLCH) | 2.08% |
Proshares Short High Yld (SJB) | -4.21% |
ProShares Decline of Retail (EMTY) | -7.18% |
Proshares Short Bitcoin (BITI) | -8.43% |
ProShares UltraShort QQQ (QID) | -18.07% |
Bond Funds | 1mo % |
---|---|
Vanguard Extended Duration Treasury (EDV) | 14.03% |
Vanguard Long-Term Bond Index ETF (BLV) | 9.97% |
Vangaurd L/T Treasury (VGLT) | 9.10% |
iShares JP Morgan Em. Bond (LEMB) | 4.62% |
[Benchmark] Vanguard Total Bond Index (VBMFX) | 4.50% |
BondBloxx Six Month Treasury ETF (XHLF) | 0.57% |
October 2023 Performance Review
Rising rates impacted nearly all fund categories in October. A global balanced portfolio of stocks and bonds fell harder than the S&P 500, as foreign stocks and global bonds underperformed, with rising rates contributing to the strengthening of the US dollar. Although numbers showing continued progress on inflation in November have so far reversed the downturn experienced in October, speculation about when rates will decrease continues to influence market movements. The housing market, in particular, seems most reliant on the belief that the current higher rates will not persist.
Our Conservative portfolio declined 3.60%, and our Aggressive portfolio declined 3.25%. Benchmark Vanguard funds for October 2023 were as follows: Vanguard 500 Index Fund (VFINX), down 2.11%; Vanguard Total Bond Index (VBMFX), down 1.57%; Vanguard Developed Mkts Index (VTMGX), down 3.56%; Vanguard Emerging Mkts Index (VEIEX), down 3.44%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, down 2.95%.
The average fund category return was negative 2.26% in October, and the average fund category is now up under 1% for 2023. The strong returns are largely in larger-cap US growth stocks this year, as the S&P 500 is still up a solid 10.69% for the year with dividends, even with the drop in October. The only strong areas are risky debt as recession fears slip away, and stocks in Japan. The cryptocurrency bubble just won't die and is the hottest area this year, though still well off the 2021 highs.
With the strength in early November, The S&P 500 index is only about 5% away from all-time highs hit at the end of 2021. The bond market is still down about 20% from the highs, with longer-term government bonds down around 40% — the biggest drop ever.
In our own portfolios, what little gains we had in short funds were more than wiped out by drops in all stock funds and our long-term bond funds. The rising dollar particularly hit Franklin FTSE Germany (FLGR) hard with a 6.1% drop, and took down iShares JP Morgan Em. Bond (LEMB) 4.18%, a riskier debt fund that has actually done well relative to safe debt in recent years. Rising rates drove Vangaurd L/T Treasury (VGLT) down 7.31% and a whopping 11.41% hit to Vanguard Extended Duration Treasury (EDV). Rising rates have
Stocks are joining real estate in being priced as if the economy isn't going to slow down, inflation is heading back to target levels of around 2% a year, and interest rates will probably head down to around 3%. This could happen, but if it doesn't, there will be problems. Bubbling problems in commercial real estate also can't spread to the broader real estate market, much less the economy. Any deviation from this expectation will likely lead to lower real estate prices and stocks, but possibly higher bond prices as rates go down. The worst case for bonds is inflation settling into 3-4% as a new normal, the economy remains solid, real estate and stocks are okay with it as the Fed doesn't want to risk a crash and is comfortable with 5%-ish rates, and long-term rates go up to over 6% hurting bond prices again.
At this point in bond versus stock valuations, bonds offer a compelling risk-reward almost as good as in 2000 when stocks were a bit more pricey and bonds yielded closer to 6%, not 5%. There has been money going into longer-term bond funds lately, so investors aren't panic selling bonds after the losses, which would be the case if bonds were a true bargain today.
The renewed speculative energy by crypto and stock investors is a tough part of the economy to cool down with higher rates. The Fed faced the same problem in the 1920s when they raised rates not to cool inflation — which was low — but to cool speculation. When investors get it in their heads that stocks and real estate can't go down over a few years — reinforced by recent history — it doesn't matter if rates are 3% or 8%. Until it matters all of a sudden, as was the case in 1929.
Stock Funds | 1mo % |
---|---|
ProShares UltraShort QQQ (QID) | 11.43% |
ProShares Decline of Retail (EMTY) | 7.39% |
Proshares Short High Yld (SJB) | 2.06% |
Franklin FTSE Brazil (FLBR) | -0.65% |
LeatherBack L/S Alt. Yld. (LBAY) | -1.75% |
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX) | -2.06% |
Franklin FTSE Japan ETF (FLJP) | -2.36% |
Invesco CurrencyShares Euro (FXE) | -2.37% |
VanEck Vectors Pharma. (PPH) | -2.49% |
Homestead Value Fund (HOVLX) | -2.61% |
Proshares Short Bitcoin (BITI) | -2.86% |
Vanguard Value Index (VTV) | -3.27% |
Franklin FTSE China (FLCH) | -3.53% |
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX) | -3.71% |
Vanguard FTSE Developed Mkts. (VEA) | -3.78% |
Vanguard Communications ETF (VOX) | -3.86% |
Vangaurd All-World Small-Cap (VSS) | -4.25% |
Vanguard FTSE Europe (VGK) | -4.49% |
[Benchmark] Vanguard 500 Index (VFINX) | -4.77% |
Franklin FTSE South Korea (FLKR) | -5.12% |
Franklin FTSE Germany (FLGR) | -6.10% |
UltraShort Bloom. Crude Oil (SCO) | -9.81% |
Bond Funds | 1mo % |
---|---|
BondBloxx Six Month Treasury ETF (XHLF) | 0.38% |
[Benchmark] Vanguard Total Bond Index (VBMFX) | -2.49% |
iShares JP Morgan Em. Bond (LEMB) | -4.18% |
Vanguard Long-Term Bond Index ETF (BLV) | -6.31% |
Vangaurd L/T Treasury (VGLT) | -7.31% |
Vanguard Extended Duration Treasury (EDV) | -11.41% |
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September 2024 Performance Review
Stocks and bonds had a solid month as investors grow increasingly comfortable with the notion that we can avoid a recession and inflation with the current path of central bank management. The real action was in China — the hottest market by far — with more than a 20% return in September, mostly from the last two weeks alone.
Our Conservative portfolio gained 0.81% in September, and our Aggressive portfolio gained 2.04%. Benchmark Vanguard funds for September 2024 were as follows: Vanguard 500 Index Fund (VFINX) up 2.42%; Vanguard Total Bond Index (VBMFX) up 1.33%; Vanguard Developed Mkts Index (VTMGX) up 2.87%; Vanguard Emerging Mkts Index (VEIEX) up 1.07%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 1.99%.
The speed at which China went from deeply troubled in the eyes of investors to the number one performer raises more questions than answers. While an out-of-favor area can always do well when sentiment changes, a roughly 50% gain from the bottom in January for the world’s second-biggest economy is surprising. The fertile ground of low prices resulting from numerous bad news stories for investors was watered by the decision to boost economic stimulus aggressively in China.
Several points are worth noting. While many regions in China are heavily indebted and likely sitting on a real estate bubble plus massive overcapacity in manufacturing (facing a sluggish European buyer and increased Western tariffs), and anti-China sentiment is increasing due to China’s indifference to trade with Russia, the Chinese government remains in a strong position compared to most other major economies with much flexibility to borrow and spend without causing inflation or leading to a debt crisis. We should be so lucky going into our next economic problem.
This highlights the importance of having the capacity to borrow and spend when trouble lurks. With such excess housing and manufacturing (unlike the U.S.), the government in China has more flexibility without boosting prices. In the USA, you send a few checks in the mail and sign a few stimulus loans—many fraudulent—and before you know it, rents and insurance are up over 40%.
Another interesting feature is that despite all the Fed's rate increases and balance sheet reductions, there is still tons of money floating around, much of it in short-term bonds and cash, that is looking for something exciting to pounce on now that rates are drifting down. U.S. real estate and stocks remain elevated, likely with limited upside even with lower rates, so out of favor assets are attracting attention with any positive news.
The U.S. dollar weakened with falling rates as our yield advantage over other countries seemed on the way out. This boosted our iShares JP Morgan Em. Bond (LEMB) holding, up 2.89%, as well as most foreign stock ETFs.
Utilities remain a popular bet given AI’s insatiable energy demands, a still hot and energy-intensive crypto business, and a resilient economy. Utility funds were up around 6% last month and an S&P 500-beating 26% for 2024.
Precious metals remain surprisingly hot even with inflation retreating. Gold fans can always spin a story—if rates are high to fight inflation, it’s somehow good for gold because inflation is high; if rates retreat with inflation, it’s also somehow good because why own cash if rates are low?
Lower rates seem to be supporting many yield-oriented areas like real estate funds. The only real weak areas last month were health care and energy funds. We had a boost shorting crude oil, but our health care fund VanEck Vectors Pharma. (PPH) was down 4.43%, but other shorts were a drag.
Going forward, we're curious how this big rise in China plays out—with some profit-taking or more hot money jumping in. Or do other out-of-favor areas, like Brazil, join in?