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April 2018 Performance Review

May 5, 2018

April was not a particularly good month for stocks or bonds but once again the modest monthly change disguised the intramonth and often intraday volatility that is becoming more common in the stock market. Foreign non-emerging market stocks performed well. Riskier debt moved up slightly but longer-term, investment grade bonds and foreign bonds slid as the dollar reversed a steady decline. Our government debt now pays substantially higher interest rates than other major economies, and it's likely attracting inflows of cash which could push our currency back up in value.

Our slant towards longer-term bonds didn't help in April compared to benchmarks. Our Conservative portfolio declined 0.88%. Our Aggressive portfolio fell 0.56%. Benchmark Vanguard funds for April 2018 were as follows: Vanguard 500 Index Fund (VFINX) up 0.37%; Vanguard Total Bond Market Index Fund (VBMFX) down 0.83%; Vanguard Developed Markets Index Fund (VTMGX) up 1.55%; Vanguard Emerging Markets Stock Index (VEIEX) down 2.03%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, down 0.07%.

Much of the volatility in stocks appears to be related to ten-year government bonds getting to around the 3% level. The worry is that rates will blow through that threshold and shoot up to 4% and beyond with rising inflation fears. The already strong economy is now getting fanned by increased spending and tax cuts. Effectively we've got a small stimulus package kicking in when unemployment is already below 4%. Nobody really knows what will happen to the economy if borrowing costs rise significantly but if interest rates rise in anticipation of higher inflation it could cause problems — particularly for the government than needs to rollover trillions in debt at higher interest rates.

This interest rate focus may be taking away from an issue which is more about growth stocks: are these earnings growth rates and rocketing stock prices sustainable? Or are we near the end of another boom cycle in tech with signs of over-indulgence everywhere?

A more value and yield-oriented portfolio could beat a more growth and risk-oriented portfolio in coming years, which would be a near-reversal of the last decade or so. We may still see gains in growth, but the risk-vs-return is becoming unfavorable in the types of stocks that rely more on earnings growth to rationalize higher prices.

We're getting close to year-2000 levels (when value was where you wanted to be, not growth) and farther away from 2008 (when growth, particularly U.S. growth stocks, was where your portfolio should have tilted). Growth index funds have now beat value index funds by just over 2% a year over the last decade — a sizable difference.

The most surprising action in April was the performance of yield oriented stocks like those in utility and telecom funds. These did well even as the stock market was barely up and while interest rates moved higher. Vanguard Utilities (VPU) climbed 2.47% and Vanguard Telecom Services ETF (VOX) rose 1.36%. This may because these areas have been so weak that they are attracting value investors. In general value stocks are getting attractively priced relative to growth stocks after about a decade of growth beating value by upwards of 2% a year.

Oil continued to move higher even as the U.S. dollar rose, which is typically bad for oil prices. Our oil short fund PowerShares DB Crude Oil Dble Short (DTO) fell 10.65% in April, and this time ETRACS 1xMonthly Short Alerian MLP (MLPS) fell 7.51%, reversing some of the recent gains. While this likely won't happen if the economy remains strong, oil is now priced for a near 50% hit if we get a global slowdown.

Stock Funds1mo %
Proshares Ultrashort NASDAQ Biotech (BIS)4.64%
iShares MSCI Italy Capped (EWI)4.42%
Vanguard European ETF (VGK)2.65%
Vanguard Utilities (VPU)2.47%
Gold Short (DZZ)2.30%
Vanguard Europe Pacific ETF (VEA)1.64%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)1.55%
Vanguard Telecom Serv ETF (VOX)1.36%
Artisan Global Equity (ARTHX)0.61%
Vanguard Value ETF (VTV)0.42%
[Benchmark] Vanguard 500 Index (VFINX)0.37%
iShares Mortgage REIT (REM)0.28%
Homestead Value Fund (HOVLX)-0.28%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)-2.03%
Proshares Ultrashort Russel2000 (TWM)-2.39%
iShares MSCI BRIC Index (BKF)-2.66%
ETRACS 1xMonthly Short Alerian MLP (MLPS)-7.51%
PowerShares DB Crude Oil Dble Short (DTO)-10.65%
Bond Funds1mo %
Artisan High Income Fund (ARTFX)0.38%
Vanguard Mortgage-Backed Securities (VMBS)-0.49%
[Benchmark] Vanguard Total Bond Index (VBMFX)-0.83%
Vanguard Long-Term Bond Index ETF (BLV)-2.04%
Vanguard Extended Duration Treasury (EDV)-2.77%
SPDR Barclays Intl. Treasury (BWX)-2.80%