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.
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?
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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?