With the Federal Reserve now more worried about the global economy than inflation, investors continued to jump back into stocks — causing U.S. markets to almost completely erase the sharp slide late last year.
With our long-term bond funds performing well, many of our stock funds beating the S&P 500, and even most of our shorts doing well (except for oil), we actually outpaced the S&P 500 in both portfolios and beat our balanced fund benchmark by a fairly wide margin in March — all at a lower risk profile.
Long-term interest rates have plunged, as the Federal Reserve said they will dial back the money furnace that was essentially removing about $50 billion a month from the economy — a very slow rate of burn to the near $4 trillion in quantitative easing or "QE" money minted during the financial crisis. The recent action means more of the interest payments coming into the Fed on the bonds they bought with fabricated money will get recycled back into new bonds — essentially creating demand in the bond market and pushing down rates. This means mortgages get cheaper and we've seen a 30-year mortgage rate go from around 5% to around 4% in the last few months. Just the talk of this balance sheet reduction slowdown led investors to pile into long-term bonds.
But unless the Fed is now totally wrong about the economy and the economy is hotter than it looks globally, being more "accommodative" isn't going to kick off new boom times. At best, we may just avoid a recession. Bottom line, it's great that the Fed didn't cause a recession by fighting inflation too aggressively, but that won't create a boom either. It might create inflation (unlikely), but even that can be good for stocks and real estate. This is why investors like a Fed that errs on the side of too much inflation.
Normally, when the market is strong our shorts are weak, but last month, small cap, biotech, and gold were down while the market as a whole was up, boosting our shorts. Oil did continue this year's rally, hurting our oil short as the oil slide from last year reversed on optimism about lower interest rates and some oil production cuts.
The large cap growth vs small cap value performance gap was one of the worst over what has been a fairly wide performance gap over time, resulting from small cap value being overvalued about a decade ago relative to larger cap growth stocks. Large cap growth funds were up just over 2% for the month, while small cap value funds were down just over 3%.
Stocks in China seem to be benefiting from what looks like an improvement in the trade war, with funds in this area up almost 4% for the month (bested only by a near 10% rise in stocks in India). Latin American stocks were the only really weak area abroad, with a just over 3% slide for the month. Latin America has been the worst area over the last 5 years. Like small cap value, Latin American stocks got way too popular in the early 2000s. Financial sector funds were the worst sector, down 3.6%, as investors think the flat-to-negative yield curve is going to be bad for earnings.
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With the Federal Reserve now more worried about the global economy than inflation, investors continued to jump back into stocks — causing U.S. markets to almost completely erase the sharp slide late last year.
With our long-term bond funds performing well, many of our stock funds beating the S&P 500, and even most of our shorts doing well (except for oil), we actually outpaced the S&P 500 in both portfolios and beat our balanced fund benchmark by a fairly wide margin in March — all at a lower risk profile.
Our Conservative portfolio gained 2.41%. Our Aggressive portfolio gained 1.97%. Benchmark Vanguard funds for March 2019 were as follows: Vanguard 500 Index Fund (VFINX) up 1.94%; Vanguard Total Bond Market Index Fund (VBMFX) up 1.96%; Vanguard Developed Markets Index Fund (VTMGX) up 0.42%; Vanguard Emerging Markets Stock Index (VEIEX) up 1.90%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 1.17%.
Long-term interest rates have plunged, as the Federal Reserve said they will dial back the money furnace that was essentially removing about $50 billion a month from the economy — a very slow rate of burn to the near $4 trillion in quantitative easing or "QE" money minted during the financial crisis. The recent action means more of the interest payments coming into the Fed on the bonds they bought with fabricated money will get recycled back into new bonds — essentially creating demand in the bond market and pushing down rates. This means mortgages get cheaper and we've seen a 30-year mortgage rate go from around 5% to around 4% in the last few months. Just the talk of this balance sheet reduction slowdown led investors to pile into long-term bonds.
But unless the Fed is now totally wrong about the economy and the economy is hotter than it looks globally, being more "accommodative" isn't going to kick off new boom times. At best, we may just avoid a recession. Bottom line, it's great that the Fed didn't cause a recession by fighting inflation too aggressively, but that won't create a boom either. It might create inflation (unlikely), but even that can be good for stocks and real estate. This is why investors like a Fed that errs on the side of too much inflation.
Normally, when the market is strong our shorts are weak, but last month, small cap, biotech, and gold were down while the market as a whole was up, boosting our shorts. Oil did continue this year's rally, hurting our oil short as the oil slide from last year reversed on optimism about lower interest rates and some oil production cuts.
The large cap growth vs small cap value performance gap was one of the worst over what has been a fairly wide performance gap over time, resulting from small cap value being overvalued about a decade ago relative to larger cap growth stocks. Large cap growth funds were up just over 2% for the month, while small cap value funds were down just over 3%.
Utilities were our strongest regular stock fund holding, with Vanguard Utilities (VPU) up 2.83% followed by some foreign markets that are rebounding well this year, driving iShares MSCI BRIC Index (BKF) up 2.72%, iShares Global Telecom ETF (IXP) up 2.51%, and iShares MSCI Italy Capped (EWI) up 2.36%. In general, higher yield stocks do well when rates go down, as the dividend yield becomes more attractive. As long-term bonds had a great month, we saw a 7.47% jump in Vanguard Extended Duration Treasury (EDV) and a 4.87% rise in Vanguard Long-Term Bond Index ETF (BLV). Our strong U.S. dollar limited the gains of SPDR Barclays Intl. Treasury (BWX) at 0.89% and Dodge & Cox Global Bond Fund (DODLX) at 1.23%.
Stocks in China seem to be benefiting from what looks like an improvement in the trade war, with funds in this area up almost 4% for the month (bested only by a near 10% rise in stocks in India). Latin American stocks were the only really weak area abroad, with a just over 3% slide for the month. Latin America has been the worst area over the last 5 years. Like small cap value, Latin American stocks got way too popular in the early 2000s. Financial sector funds were the worst sector, down 3.6%, as investors think the flat-to-negative yield curve is going to be bad for earnings.