The stock market continues to rebound from all the traumatic events of the past year or so. Strangely, this is not due to particularly strong expectations for growth globally; it appears to be mostly related to interest rates declining in anticipation of an economic slowdown. The rate decline pushed up bond prices again, keeping us more or less in the ballpark of more stock-heavy (and risky) portfolios.

Our Conservative portfolio gained 3.17%. Our Aggressive portfolio gained 3.49%. The results for benchmark Vanguard funds for June 2019 were as follows: Vanguard 500 Index Fund (VFINX), up 7.03%; Vanguard Total Bond Market Index Fund (VBMFX), up 1.15%; Vanguard Developed Markets Index Fund (VTMGX), up 5.93%; Vanguard Emerging Markets Stock Index (VEIEX), up 5.42%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 5.07%.

While there are continued fears over the trade war leading to gyrations in stock prices, the real risk is whether we get a global economic slowdown — which, if it happens, probably won't be because of a relatively small trade war of a few billion dollars a year in taxes, a sum eclipsed by the tax cuts we have already received.

The stock market doesn't seem to think a real economic slowdown is in the cards as it makes record highs, but the bond market says a recession is likely — it is like two different economies.

Stock market investors are hoping that the low interest rates caused by fear of a global slowdown will lead to the economy avoiding a recession from the boosting of low rates. In addition, the expectation is now that the Federal Reserve will lower rates soon to fight the slowdown, and it will work maybe a little too well. Basically, investors are hoping the economy looks worse than it actually is and that low rates will juice the economy, just like the tax cuts and increased spending did last year. This may not be as crazy as it sounds, given we're even considering cutting rates to boost an economy with a 3.6% unemployment rate — and the short-term rates the Fed controls directly never broke 2.5% on the way up, which is less than half the level of before the 2008 recession.

None of this addresses how we will buy ourselves out of a serious recession, if one appears. We have government power split dysfunction again, and have already lowered taxes and increased spending — a de facto stimulus plan. All the Fed can do is lower short-term rates by a couple of percentage points, after which we have little available in turbo boost except more money creation to buy our own debt.

We will probably need to create money to buy our debt because our yearly deficit will quickly skyrocket above $1 trillion. It is already going to be around $900 billion for this fiscal year, and that's in good times. In 2009 the deficit about tripled to $1.4T from the previous year. Next time around we may have to raise taxes in a recession to keep the deficit under $2T. Or try Modern Monetary Theory, or MMT, the hipster central bank strategy of just printing money to pay for stuff. Apparently that is a question for another day, because record stock market closes continue…

Our only S&P-beating stock fund performer in June was iShares MSCI Italy Capped (EWI), up 9.72% as a rising euro and receding fears of politically oriented economic problems boosted prices. Yield-oriented funds such as Vanguard Telecom Services ETF (VOX), Vanguard Utilities (VPU), and iShares Global Telecom ETF (IXP) were our weakest non-short funds, with gains between roughly 3% and 4%. This was a month when the S&P 500 beat almost all fund categories, except in a few strong areas such as Latin America and Precious Metals. Our longer-term and foreign bonds did well compared to the bond index with a 3.43% return for SPDR Barclays Intl. Treasury (BWX), a 2.79% return for Dodge & Cox Global Bond Fund (DODLX) and a 2.69% return for Vanguard Long-Term Bond Index ETF (BLV).

The stock market has recovered all of the losses since the previous peak in late September 2018. This quick reversal was largely because interest rates are now lower than last year, and the Federal Reserve will not spark the next recession by raising rates, as inflation is mild at best.

The U.S. economy, and now much of the world, seems not to be sliding into an economic slowdown. These are good reasons for the market not to drop by more than the 20% it fell late last year, but not really good enough reasons for new record highs.

Our Conservative portfolio gained 1.24% in April. Our Aggressive portfolio rose 1.31%. Benchmark Vanguard funds for April 2019 performed as follows: Vanguard 500 Index Fund (VFINX), up 4.04%; Vanguard Total Bond Market Index Fund (VBMFX), up 0.04%; Vanguard Developed Markets Index Fund (VTMGX), up 2.90%; Vanguard Emerging Markets Stock Index (VEIEX), up 2.08%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 2.61%.

With bonds weak in April and with a relatively low stock exposure, we had a hard time keeping pace with benchmarks. While stocks worldwide have been strong this year, foreign markets (unlike the U.S. market) are still below their peaks of early 2018 and are actually not far from their pre-crash 2007 levels. The U.S market, if we include dividends, has more than doubled from its pre-crash 2007 highs.

Much of this lackluster decade-plus return abroad has been due to a rising U.S. dollar, but better U.S. economic growth and more dynamic growth companies — and now a corporate tax cut — play a big part in the U.S. market's relative strength, as well as the strong dollar. Our interest rates are also significantly higher than those in foreign markets, which attracts capital, which boosts our currency. In 2008, one euro was worth about $1.60. Lately it has been kicking around $1.12, which is around a 30% decline.

Given the current low valuations abroad and the potential for the dollar to slowly slide over the next decade, returns from abroad should be higher. The problem with this forecast is that it is fairly popular, and there is still more money going into foreign funds than into domestic stock funds, though much of this is from rebalancing into the underperforming stock category. The euro can go lower too; it was worth only $0.80 back in 2002, before the big run up in foreign stocks.

Investors' money hasn't returned to stocks even though prices have rebounded. Stock buybacks from companies are probably a bigger driver than mutual funds and ETFs now. Money flows to stock funds in 2018, U.S. and foreign combined, were negative by about $50 billion — and turned negative for the year only in December 2018, right before the market took off.

Flows this year are still flat to slightly negative; investors aren't buying into it, and that is probably the best single sign for stocks at these elevated levels. Investors put in much more in early 2018, at the start of a rocky year. The actual investor return in the market has been worse than the market because of poorly timed investments, as is often the case.

In funds in April the telecom sector was hot, largely because of technology shares that have been infiltrating the holdings of these formerly conservative dividend-oriented funds. Facebook and its ilk have recovered nicely this year, boosting these funds. As a reference to how much these funds have changed, our holding Vanguard Telecom Services ETF (VOX), up 6.06% last month, now yields just over 1% compared to the Vanguard 500's roughly 1.9% yield. Traditionally, telecom funds have had higher yields than the market. AT&T has a roughly 6% dividend yield, and Verizon yields over 4%. Our newer global telecom fund, iShares Global Telecom ETF (IXP), up 5.17% last month, has seen the dividend yield drop by half as well, thanks to Facebook and Google pushing Verizon and AT&T to new lower allocations in the portfolio. We expect to exit these funds soon.

In bonds, all our holdings were down except our relatively new holding Dodge & Cox Global Bond Fund (DODLX), up 0.93%, as riskier bonds and some foreign bonds had a decent month relative to safer longer-term bond funds that take less credit risk.

The bottom line is that we may have dodged an economic bullet. Our current tax cuts and low interest rates may have coincided with an economic slowdown and essentially acted as a stimulus to avoid a slowdown, if not a full recession. This doesn't guarantee no more big slides in stocks or much higher highs, and most bear markets start well before recessions start anyway. Avoiding a recession and starting a new bull market are two different things.

We still have an epic boom in technology that will have to cool down at some point. It might make sense to hide in foreign value stocks, far away from the domestic craziness in growth stocks. On the plus side, investors are not that enthusiastic about U.S. stocks, and that usually means the market will be fine.

The market continued to recover quickly from the slide late last year. This year, the leaders are mostly the areas that fell the hardest during the mini-bear market of 2018. With foreign markets, value stocks, and lower credit risk bonds weak in February and our relatively low allocation to the hotter areas of the market (like tech and small cap), our model portfolios lagged the U.S. market.

Our Conservative portfolio gained 0.93%. Our Aggressive portfolio gained 0.73%. Benchmark Vanguard funds for February 2019 were as follows: Vanguard 500 Index Fund (VFINX), up 3.20%; Vanguard Total Bond Market Index Fund (VBMFX), down 0.06%; Vanguard Developed Markets Index Fund (VTMGX), up 2.18%; Vanguard Emerging Markets Stock Index (VEIEX), up 0.65%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 2.31%.

Our best performers were Homestead Value (HOVLX) and Vanguard Utilities (VPU), with 4.73% and 3.88% returns in February. This was a relatively weak month for value- and dividend-oriented stocks, so these were, to a certain extent, outliers. Telecom stocks were weak globally, with Vanguard Telecom Services ETF (VOX) and iShares Global Telecom ETF (IXP) barely up at all. Other than a 1.63% return shorting gold with Gold Short (DZZ), our weakest areas, as you would imagine, were short funds as global stocks and oil rose.

In bonds, all our funds fell except for a relatively new holding Dodge & Cox Global Bond Fund (DODLX), which is actively managed (not an index fund) and takes a little more credit risk than our other holdings that were held down by slightly rising interest rates.

The hottest areas last month included U.S. small-cap growth funds, up just over 6% in February, almost double the S&P 500. Stocks in China were hot, as their economy and stock market probably have more to gain if this trade war winds down because they have seen more of a drag to both.

Emerging markets in general performed about as well as the U.S. market last month. Investors were comfortable with risk again as higher credit risk bonds did well, even as safer, longer-term bonds were down. Technology stocks continued a sharp rebound, though energy stocks didn't rise with oil prices.

Much of this rebound is driven by relief that the Federal Reserve is no longer on inflation watch, risking causing our next recession to fight it. In addition to not raising shorter term rates more, the Federal Reserve is likely going to slow—if not stop—the already slow unwinding of the so-called "balance sheet".

In brief, this is the roughly $4 trillion in new money the Fed created during the financial meltdown and its aftermath to counter the money destruction and deflationary forces in a crashing economy. The Fed essentially created money out of thin air, bought bonds mostly from the U.S. Government, then sat on those bonds, collecting interest. This put new money into the system and lowered longer-term interest rates including, importantly, mortgage rates. They called this process "Quantitative Easing", or QE, rather than "New Money Maker" or something that might frighten investors.

The unwinding means the Fed essentially burns the interest payments they were receiving monthly—to the tune of around $55 billion a month—in a digital furnace. This is the opposite of what they were doing when they created money in the crash aftermath years. Investors started getting scared this printing press in reverse was going to cause a recession, so the Fed is now considering collecting the interest payments and just buying more debt with them (as opposed to destroying the payments and making the money pool shrink). This means in the next recession we'll probably just start creating even more money out of thin air to buy bonds again because, even in a good economy, we can barely destroy some of the new money created in the last recession without a mini-meltdown.

While this all seems quite scary, it is still one step away from actually creating money to buy government debt and then saying "Forget it. You don't owe us anything, U.S. Government. Keep the new money." That is called monetizing the debt and, officially, we are not there yet. Even monetizing the debt is still a step away from just printing money and paying bills, like they apparently have been doing in Venezuela.

The important distinction between us and Venezuela is we can still reverse engines if inflation picks up. In fact, we have more power to stop inflation than perhaps at any time in history because we can just sell our $4 trillion in bonds and destroy the proceeds. Imagine selling a bond you own, getting cash out from the bank, and burning it in the backyard—that money is gone from the system. You are shrinking the money supply and doing the opposite of leaving that money in the bank, where it would become available to make new loans.

But the danger here is not inflation, even though it seems the obvious risk attached to creating money to fix problems. The danger is deflation and recessions that can't be fixed, even by unorthodox monetary policy. Since our government is now growing the yearly deficit again significantly—just recently, we started moving close to a gap of $1 trillion a year between what we collect in tax revenues and what we spend—our ability to fight the next recession with more tax cuts and interest rate cuts is diminishing. Nobody wants to shore up the budget, and investors freak out when interest rates go up. We're trapped.

This situation could increase the severity of our next recession and the next bear market

On Christmas Eve in this very rocky December, the stock market, as measured by the S&P 500, was down 20% from its October peak. Technically, this wasn't officially a bear market as the price slide from the peak closing value in the S&P 500 to the bottom in late December was just shy of 20%. Officially, the market needs to be down 20% from a market close to market close. Unofficially, this is a silly concept, and any 20% drop from a high in the market should qualify as something bigger than a "correction" (itself an overly positive term), which is a 10% drop. Whatever you want to call it, we haven't had many of these drops since the 2009 bottom, which is one reason investors are skittish—the good times have to end eventually, right?

Any way you slice it, December was the sort of month where the benefit of not taking on too much risk and avoiding popular strategies worked, basically the opposite tack from the previous months.

Our Conservative portfolio declined 0.35% in December. Our Aggressive portfolio fell 1.66%. Benchmark Vanguard funds for December 2018 were as follows: Vanguard 500 Index Fund (VFINX) down 9.04%; Vanguard Total Bond Market Index Fund (VBMFX) up 1.80%; Vanguard Developed Markets Index Fund (VTMGX) down 5.37%; Vanguard Emerging Markets Stock Index (VEIEX) down 2.97%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, down 4.73%.

December was among our best performances relative to the S&P 500 since these model portfolios started in early 2002. It's way too early to brag, and we were lagging during the last months of this bull market such that our returns relative to the stock market are still so-so. Still, if you like sleep-at-night downside risk, it was a good near-bear market for us.

For 2018 as a whole, our performance was underwhelming but acceptable. Our Aggressive portfolio was down 5.24% compared to the negative 4.52% showing for the Vanguard 500 fund in 2018 (with dividends). Our Conservative portfolio dipped just 2.81%. The Vanguard Star fund, our globally balanced benchmark, was down 5.34% for the year. What was most interesting about 2018 was how lousy "diversified" portfolios did, even ones that are balanced with bonds and stocks. Vanguard Star Vanguard Star Fund (VGSTX) is 60% stocks and 40% bonds, and it fell more than the S&P 500 and our portfolios.

2018 was the worst year for a globally balanced portfolio since 2008. This was largely because bonds were down significantly in 2018, especially longer-term and higher-credit-risk bonds, and foreign markets were down sharply. Just looking at market gyrations up and down, we're taking less risk than the market and less even than most balanced funds. According to one hedge fund tracker, the average hedge fund fell over 4% in 2018 as the highest-paid experts in minimizing downside had trouble doing just that.

The few positive return areas in December (if not the year) included longer-term and investment-grade bond funds like those we own in the portfolios. All bond funds except short-term bond funds with limited interest rates and credit exposure (including our holdings) were actually down for the year. Still, the rebound in bond funds in December was a key reason our portfolios didn't fall much during this rough month.

Higher-yield, higher-credit-risk bonds performed poorly for the year and month as these areas tend to have near-stock-market downside during market corrections and less upside than stocks during rebounds. Selling our position in Artisan High Income Fund (ARTFX), a higher-credit-risk bond fund, in June proved timely as this fund, which was up solidly in 2016 and 2017 and early 2018, slid 5.27% in the last three months of 2018 year.

The only fund sector in positive territory in 2018 was utilities. Our own Vanguard Utilities (VPU) holding was down 4.12% in December but still delivered a positive 4.37% for the year. After technology, utilities have shown the highest returns over the last five years in sector mutual funds, sort of amazing in this growth-oriented market. Considering the lower down side, the risk/reward has been very good.

Unfortunately, our inverse MLP (Master Limited Partnerships) fund was shut down for lack of investor interest in 2018 right before shorting energy-related investments started working very well. This could have helped our Conservative portfolio score even better numbers in 2018. MLPs fell as much as 20% in the last three months of 2018 and were down double-digits for the year. Our oil short PowerShares DB Crude Oil Dble Short (DTO) was up 18.59% after a 45%+ gain the previous month, yet only delivered a 13.77% return for the year. The smart move would have been doubling up on this holding when the short MLP fund was closed.

Shorting in general obviously worked well in December, except for shorting gold. Proshares Ultrashort Russel2000 (TWM) was up 26.35% for the month for a 19.19% year, while Proshares Ultrashort NASDAQ Biotech (BIS) gained 24.40% but was only up 5.18% for the year.

Conceptually, our call to favor large cap and short small cap in recent years was right in the sense that large cap funds were up 6.6% on average per year over the last five years, while small cap funds were only up 3.2%. The gap was even bigger between large cap growth and small cap value—the latter up just 1.86% per year over the last five years. But, as we noted, there were no ETFs with which to do that other than shorting small cap value ETFs directly. Our short positions in inverse ETFs dwindled during the booming market (because they are flawed products) such that the offsetting gains where limited here.

So, is this a dip to buy or the start of a 50% slide?

When the market broke down in 2007 and 2008, we saw similar relative performance benefits in our portfolios compared to falling benchmarks. We also increased the risk level on the way down in that bear market by increasing our stock allocation. This worked when the eventual recovery hit. We have no way of knowing if this market slide will continue or rebound quickly (as it did after the 2011 slide and appears to be happening in January so far). Either way, a 20% decline is an opportunity for any portfolio that isn't on a fixed-risk level (say, 60% stocks, 40% bonds permanently) to start increasing risk. If the market goes down 50%, we aim to be as aggressive as we were in early 2009, meaning our downside risk can start increasing on the way down in order to boost our upside.

Ouch. The good times ended in October and rather suddenly at that. There are many straws out there, and it's impossible to know which one broke the market's back but break it did.

The best explanation, which is one part voodoo and one part real economics, was that the market has been up for so long that investors were looking for signs that the music was going to stop. The sign was rising interest rates leading to fears that the global economy and real estate market couldn't handle higher rates. This in turn led to worry that tech stocks have risen so far so fast that the downside is exceeding the upside.

In October, our Conservative portfolio declined 3.52%. Our Aggressive portfolio declined 3.11%. Benchmark Vanguard funds for October 2018 were as follows: Vanguard 500 Index Fund (VFINX) down 6.85%; Vanguard Total Bond Market Index Fund (VBMFX) down 0.73%; Vanguard Developed Markets Index Fund (VTMGX) down 8.49%; Vanguard Emerging Markets Stock Index (VEIEX) down 7.58%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, down 5.71%.

Even with our interest-rate-sensitive portfolios with significant foreign exposure (a performance drag), we fell significantly less than the S&P 500. More notable is that the global total portfolio benchmark that we also aim to beat over time, the Vanguard STAR fund, was down 5.71%, almost as much as the S&P 500 and quite a bit for a diversified global portfolio that is only 60% stocks. We're trying to deliver a better risk/reward tradeoff than this balanced fund (not an easy task given this is a great low-fee total portfolio fund, but we aim high) but have been lagging it recently on the way up. As you can see, such upside performance often comes at a price—Vanguard STAR was taking quite a bit more downside risk than we were.

One reason balanced portfolios fell in October is that all categories fell. That has become the new problem with building portfolios: there is nowhere to hide when the drops come but low-return cash. Diversification doesn't really work anymore.

The best-performing fund categories in October were precious metals, utilities, and Latin America. Not coincidently, precious metals funds and Latin American funds have some of our highest category ratings on MAXfunds: 91 and 97, respectively. We're still short gold because we don't believe it has any long-term investment merit, and our limited stake in Latin American stocks in our iShares MSCI BRIC Index (BKF) fund was offset by losses in the RIC part—Russia, China, India—of BRIC (though the fund fell less than emerging markets in general).

Other areas of relative strength include value stocks in general, an area we are focusing more on after the big run in growth and tech this past decade or so. But our only traditional stock fund that posted a gain was Vanguard Utilities (VPU), up 1.17%—even Vanguard Value (VTV) was down 4.35%.

Homestead Value (HOVLX) dropped 9.03% despite being a value fund because it's somewhat of a tech value fund now. The fund's holdings are probably more economically sensitive than many other value funds, and the fears of rates hurting the economy hit this fund hard.

All our bond funds where down, but long-term bonds fell the hardest with Vanguard Extended Duration Treasury (EDV) down the most at 4.61%. Long-term rates shouldn't go up much from here (at least not quickly without risking much more downside to stocks). You'd rather be in long-term bonds with the moderate loss you will take than the stock alternatives if rates climb quickly.

The shining stars of October were our three short funds, all up high double digits: PowerShares DB Crude Oil Dble Short (DTO) up 18.6%, Proshares Ultrashort Russel2000 (TWM) up 24.56% and Proshares Ultrashort NASDAQ Biotech (BIS) up 33.42%. These funds, which can slowly go to nothing over time as markets long term go up, can be useful in a crash scenario. We should have rebalanced into a short tech fund because our short stake was so small after dwindling in value in the portfolio from losses in the bull market as to have minimal upside performance impact. That said, we did beat the balanced portfolios out there and these funds are a good part of the reason our "riskier' aggressive portfolio actually fell by less than our short-fund-free conservative portfolio.