This year is turning out to do much more for stocks than merely reversing the sharp declines of late 2018. The risk is that if corporate earnings don't continue growing at a reasonably fast pace to meet the increasingly high expectations of stock prices, the drop in the next recession is going to be that much worse.
It wasn't a good month for our portfolio relative to benchmarks, as bonds were basically flat for the month, dragging at our bond funds. The US dollar rose a little, hurting our foreign bond funds and dragging on foreign stocks relative to the US market. We had one value fund Homestead Value (HOVLX) beat the S&P 500, while our foreign stock funds were up between zero and about half as much as the US market. Shorting anything but gold hurt our returns. Emerging markets and Italy were barely up at all. Utilities were down around 2%.
At this point, only in early 2000 was the US stock market more overpriced for stocks, creating a potential for a bigger decline than today. Yet that crash was easier to diversify out of, with much higher interest rates on cash and bonds back then, and lower valuations abroad and in smaller cap and value stocks. The next drop will probably be more like 2007—2009 with across-the-board global slides. On a more disturbing note, there will be less ammunition from the Federal Reserve and White House to fight the next big one than there was to fight the last two recessions and stock slides, as the US had ample room for debt expansion, and interest rate and tax cuts, in those past recessions.
The best case for stocks (other than a strong global economy for years to come, which is still possible) is interest rates remaining low globally and continuing to deliver negative inflation-adjusted yields for safe bonds in most countries, yet high enough inflation that stocks at least have inflatable dividend yields and earnings growth. In other words, you lose a little in bonds and gain a little in stocks.
A 10-year government bond yielding 0% in most major countries and maybe 1.75% in the US, with inflation 1—2% globally in major markets, is a dead-to-negative investment for a decade. But a stock market yielding 1.9% today, trading at 20+ times earnings, will deliver (if it ends up at the same valuation in 10 years) a slightly better-than-inflation return (with significant downside risk in a recession or valuation compression event). Even with zero dividends, the return will be an inflation-matching return with risk.
The lack of good options will keep the game afloat for years because there is too much money to invest globally — unless there is a scary event that makes a 50% loss seem possible. The real danger is not even higher inflation of, say, 3%+ but inflation going back to zero or negative, hurting stock prices in multiple ways including problems with companies making interest payments on their non-zero yield debt with flat-to-declining earnings. A similar (if not worse) phenomenon would happen in commercial and residential real estate, as rents flatten out or decline but interest is still due on the buildings with tenants. This is why deflation must always be stopped in its tracks — even if it means interest rates below inflation for even more years and decades to come
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This year is turning out to do much more for stocks than merely reversing the sharp declines of late 2018. The risk is that if corporate earnings don't continue growing at a reasonably fast pace to meet the increasingly high expectations of stock prices, the drop in the next recession is going to be that much worse.
Our Conservative portfolio gained 0.60%. Our Aggressive portfolio gained 0.26%. Benchmark Vanguard funds for November 2019 were as follows: Vanguard 500 Index Fund (VFINX), up 3.62%; Vanguard Total Bond Market Index Fund (VBMFX), down 0.06%; Vanguard Developed Markets Index Fund (VTMGX), up 1.40%; Vanguard Emerging Markets Stock Index (VEIEX), up 0.15%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 2.47%.
It wasn't a good month for our portfolio relative to benchmarks, as bonds were basically flat for the month, dragging at our bond funds. The US dollar rose a little, hurting our foreign bond funds and dragging on foreign stocks relative to the US market. We had one value fund Homestead Value (HOVLX) beat the S&P 500, while our foreign stock funds were up between zero and about half as much as the US market. Shorting anything but gold hurt our returns. Emerging markets and Italy were barely up at all. Utilities were down around 2%.
At this point, only in early 2000 was the US stock market more overpriced for stocks, creating a potential for a bigger decline than today. Yet that crash was easier to diversify out of, with much higher interest rates on cash and bonds back then, and lower valuations abroad and in smaller cap and value stocks. The next drop will probably be more like 2007—2009 with across-the-board global slides. On a more disturbing note, there will be less ammunition from the Federal Reserve and White House to fight the next big one than there was to fight the last two recessions and stock slides, as the US had ample room for debt expansion, and interest rate and tax cuts, in those past recessions.
The best case for stocks (other than a strong global economy for years to come, which is still possible) is interest rates remaining low globally and continuing to deliver negative inflation-adjusted yields for safe bonds in most countries, yet high enough inflation that stocks at least have inflatable dividend yields and earnings growth. In other words, you lose a little in bonds and gain a little in stocks.
A 10-year government bond yielding 0% in most major countries and maybe 1.75% in the US, with inflation 1—2% globally in major markets, is a dead-to-negative investment for a decade. But a stock market yielding 1.9% today, trading at 20+ times earnings, will deliver (if it ends up at the same valuation in 10 years) a slightly better-than-inflation return (with significant downside risk in a recession or valuation compression event). Even with zero dividends, the return will be an inflation-matching return with risk.
The lack of good options will keep the game afloat for years because there is too much money to invest globally — unless there is a scary event that makes a 50% loss seem possible. The real danger is not even higher inflation of, say, 3%+ but inflation going back to zero or negative, hurting stock prices in multiple ways including problems with companies making interest payments on their non-zero yield debt with flat-to-declining earnings. A similar (if not worse) phenomenon would happen in commercial and residential real estate, as rents flatten out or decline but interest is still due on the buildings with tenants. This is why deflation must always be stopped in its tracks — even if it means interest rates below inflation for even more years and decades to come