Stock and bond prices rebounded sharply as the trillions in Federal Reserve monetary and government fiscal spending cannons hit the market. If throwing money at the fast weakening economy turns out to be a great solution, we will win this war. If not, unfortunately we'll just have a short-term boost and a long-term mess of massive debt on top of a semi-permanently Coronavirus-slowed economy. Either way, April was a great month to pretend nothing was wrong and just own riskier assets, notably the same handful of mega cap growth stocks that have been increasingly driving stock prices recently.
US growth stocks were the best place to be globally last month, with the S&P 500 beating around 85% of fund categories. In our own portfolios, only our new energy fund Vanguard Energy (VDE) and our new small cap value pick Vanguard Small Cap ETF (VBR) beat the S&P 500 last month, with a 32.21% and 13.11% return respectively. Many hard-hit areas rebounded the sharpest, perhaps foolishly, from the depths of the crash. Our shorts were a disaster, and all our new foreign stock funds did well in general, only not compared to US stocks. Our portfolios would benefit from the US dollar weakening, which would push up foreign stock returns to US investors.
Our more recent trade this year largely took us out of longer-term and corporate bonds except for inflation-adjusted government bonds. We do have a riskier allocation to iShares JP Morgan Emerging Bond (LEMB) that was up 2.48% last month, though it was still down since first purchased at the end of February. Unfortunately, the Federal Reserve's massive support of the debt markets didn't extend directly to foreign risky bonds, just US bonds. US corporations seem to have the substantial backing of the government, but you can't say the same for emerging market debt right now.
How substantial? A few days ago you could barely see any damage to investment-grade corporate US bonds for the year after a 5% up month — a far cry from a few weeks ago, when even some municipal money market funds were on the edge of collapse. Considering trillions in investment-grade corporate debt could, realistically, default if this economic situation doesn't go away soon, current pricing in bonds is very optimistic about either continued unlimited support or a quick return to normal.
Considering our Depression-level unemployment numbers, a thing of wonder is the fact that the S&P 500 (as of May 1) is now down just over 11% for the year (and about 16% from the peak). It could simply be that investors remember the 2008 crisis, when slower-moving and relatively small (comparatively) double-barreled Federal Reserve and government spending eventually worked, and it was a heck of a buying opportunity (from the 50% down mark at least).
Under this lens of "been there, done that," we won't see a 50% drop from the top like the last crisis as too much money wants to catch the buying opportunity. It could just be the realization that bonds and cash are going to yield very little or negative for a long, long time — yet with crisis-era default risks — and stocks are the only game in town for the massive amount of money in the global economy (less massive now) that needs to invest. Basically, you are being forced into the risk game whether you like it or not because the alternative is less-than-zero returns after inflation. Do you want some upside with a high likelihood of a 25—50% drop in the short run, or no upside and a high likelihood of a 30% drop over 5—10 years adjusting for inflation?
Warning signs that more trouble is coming soon include what seems to be a credit crunch building for tapped-out consumers. Banks are fast getting out of the HELOC or home equity line of credit business, and credit card companies are cutting available credit. You can't blame them — they don't want to see epic defaults from those living off credit as incomes have plunged.
As for the various government support programs — notably the PPP loans — poor execution and bad design are leading to delays and apparent or borderline fraud. Publicly traded companies that could sell more stock (among other options) for money are borrowing through this small business facility because of the favorable partial grant and low-rate nature of the financing. This could anger lower-wage workers already nearing the end of their collective rope as society has deemed their (now risky) work essential. If this situation doesn't start going away fast, the only way stock prices are going to be down just 11% for the year is if we get inflation, which is a possibility if we keep losing production capacity and sending checks in the mail to seniors already on a guaranteed income stream, rather than the actual increasingly desperate workforce. If entry level workers voted in the numbers of Social Security recipients, this would likely not be the case.
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Stock and bond prices rebounded sharply as the trillions in Federal Reserve monetary and government fiscal spending cannons hit the market. If throwing money at the fast weakening economy turns out to be a great solution, we will win this war. If not, unfortunately we'll just have a short-term boost and a long-term mess of massive debt on top of a semi-permanently Coronavirus-slowed economy. Either way, April was a great month to pretend nothing was wrong and just own riskier assets, notably the same handful of mega cap growth stocks that have been increasingly driving stock prices recently.
Our Conservative portfolio gained 5.75% , and our Aggressive portfolio gained 5.61%. Benchmark Vanguard funds for April 2020 were as follows: Vanguard 500 Index Fund (VFINX), up 12.82%; Vanguard Total Bond Market Index Fund (VBMFX), up 1.69%; Vanguard Developed Markets Index Fund (VTMGX), up 7.67%; Vanguard Emerging Markets Stock Index (VEIEX), up 9.29%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 8.75%.
US growth stocks were the best place to be globally last month, with the S&P 500 beating around 85% of fund categories. In our own portfolios, only our new energy fund Vanguard Energy (VDE) and our new small cap value pick Vanguard Small Cap ETF (VBR) beat the S&P 500 last month, with a 32.21% and 13.11% return respectively. Many hard-hit areas rebounded the sharpest, perhaps foolishly, from the depths of the crash. Our shorts were a disaster, and all our new foreign stock funds did well in general, only not compared to US stocks. Our portfolios would benefit from the US dollar weakening, which would push up foreign stock returns to US investors.
Our more recent trade this year largely took us out of longer-term and corporate bonds except for inflation-adjusted government bonds. We do have a riskier allocation to iShares JP Morgan Emerging Bond (LEMB) that was up 2.48% last month, though it was still down since first purchased at the end of February. Unfortunately, the Federal Reserve's massive support of the debt markets didn't extend directly to foreign risky bonds, just US bonds. US corporations seem to have the substantial backing of the government, but you can't say the same for emerging market debt right now.
How substantial? A few days ago you could barely see any damage to investment-grade corporate US bonds for the year after a 5% up month — a far cry from a few weeks ago, when even some municipal money market funds were on the edge of collapse. Considering trillions in investment-grade corporate debt could, realistically, default if this economic situation doesn't go away soon, current pricing in bonds is very optimistic about either continued unlimited support or a quick return to normal.
Considering our Depression-level unemployment numbers, a thing of wonder is the fact that the S&P 500 (as of May 1) is now down just over 11% for the year (and about 16% from the peak). It could simply be that investors remember the 2008 crisis, when slower-moving and relatively small (comparatively) double-barreled Federal Reserve and government spending eventually worked, and it was a heck of a buying opportunity (from the 50% down mark at least).
Under this lens of "been there, done that," we won't see a 50% drop from the top like the last crisis as too much money wants to catch the buying opportunity. It could just be the realization that bonds and cash are going to yield very little or negative for a long, long time — yet with crisis-era default risks — and stocks are the only game in town for the massive amount of money in the global economy (less massive now) that needs to invest. Basically, you are being forced into the risk game whether you like it or not because the alternative is less-than-zero returns after inflation. Do you want some upside with a high likelihood of a 25—50% drop in the short run, or no upside and a high likelihood of a 30% drop over 5—10 years adjusting for inflation?
Warning signs that more trouble is coming soon include what seems to be a credit crunch building for tapped-out consumers. Banks are fast getting out of the HELOC or home equity line of credit business, and credit card companies are cutting available credit. You can't blame them — they don't want to see epic defaults from those living off credit as incomes have plunged.
As for the various government support programs — notably the PPP loans — poor execution and bad design are leading to delays and apparent or borderline fraud. Publicly traded companies that could sell more stock (among other options) for money are borrowing through this small business facility because of the favorable partial grant and low-rate nature of the financing. This could anger lower-wage workers already nearing the end of their collective rope as society has deemed their (now risky) work essential. If this situation doesn't start going away fast, the only way stock prices are going to be down just 11% for the year is if we get inflation, which is a possibility if we keep losing production capacity and sending checks in the mail to seniors already on a guaranteed income stream, rather than the actual increasingly desperate workforce. If entry level workers voted in the numbers of Social Security recipients, this would likely not be the case.