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November 2018 Performance Review

December 6, 2018

November was a rocky month for stocks and bonds, but it ultimately ended on a positive note. Our portfolios did well compared to the Vanguard STAR fund, which has recently had more downside than our portfolios and potentially less upside as investors shift their portfolio strategies.

Our Conservative portfolio gained 1.04% in November, and our Aggressive portfolio gained 2.15%. Benchmark Vanguard funds for November 2018 were as follows: Vanguard 500 Index Fund (VFINX) up 2.03%; Vanguard Total Bond Market Index Fund (VBMFX) up 0.53%; Vanguard Developed Markets Index Fund (VTMGX) up 0.39%; Vanguard Emerging Markets Stock Index (VEIEX) up 4.45%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 1.30%.

Just a few weeks ago, fast-rising interest rates risked dragging the housing market (and possibly the entire economy) into a mild recession. Now falling interest rates are indicating a possible recession on the horizon. There seems to be a very small band of acceptable interest rates.

The initial take by professional investors when rates went up was that they were going up for the right reasons, which means the economy is booming, demand to borrow is high, and inflation is picking up. This narrative quickly changed when stocks started to drop, and a prevailing view emerged that significantly higher rates would cause a recession for a variety of reasons, including a too-strong dollar, real estate market issues, and the great unknown of trillions in corporate debt.

When interest rates drifted back down, things improved for stocks. In recent weeks, the benchmark 10-year government bond rate drifted up towards 3.25% on several days, which equates to roughly a 5% 30-year fixed rate mortgage; each time this happened, stocks slipped hard and then recovered as rates drifted back down.

Now we are facing a more disturbing situation since the benchmark rate has sunk below 3%: rates are going down for the wrong reasons, which means a recession could be coming, and low inflation and demand for safe investments will push rates right back down to the levels we saw a year or more ago.

This drop in rates has been good for bonds and yield-oriented investments and helped our portfolios—we are effectively recession-ready relative to other portfolios. Our top three stock funds were all value- and yield-oriented, and they beat the S&P 500: Homestead Value (HOVLX), Vanguard Utilities (VPU), and Vanguard Value (VTV) went up 4.42%, 3.92%, and 3.27%, respectively. These three were only bested by our short on oil PowerShares DB Crude Oil Dble Short (DTO) and iShares MSCI BRIC Index (BKF) riding a reversal in emerging markets in general and stocks in India in particular, for a 6.48% gain.

Larger-cap value funds were the best performers in U.S. stock funds last month. Emerging market stocks and bonds had a nice run after a terrible year. These areas could see a move up if investors start to look somewhere else for risk besides U.S. tech.

The rising economic fear has also been bad for oil, which slid more in recent weeks than even after the 2008 commodity bubble burst. The trigger may have been increased output by Saudi Arabia and Russia in anticipation of Iran sanctions that never came in earnest. Fears of a recession and leveraged gamblers in the oil market unwinding their positions didn't help either. We saw a 45% gain in November shorting oil with 2x leverage in PowerShares DB Crude Oil Dble Short (DTO) after an 18% gain in October. Don't be too excited since the fund is still down slightly for the year because oil rose substantially during the economic optimism of recent months, setting up shorting oil as a good hedge against a recession. Shorting small-cap stocks and biotech stocks lost money in November as riskier stocks recovered after the slide in October.

Stock Funds1mo %
PowerShares DB Crude Oil Dble Short (DTO)45.61%
iShares MSCI BRIC Index (BKF)6.48%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)4.45%
Homestead Value (HOVLX)4.42%
Vanguard Utilities (VPU)3.92%
Vanguard Value (VTV)3.27%
[Benchmark] Vanguard 500 Index (VFINX)2.03%
iShares MSCI Italy Capped (EWI)1.36%
iShares Global Telecom ETF (IXP)1.22%
Vanguard Europe Pacific ETF (VEA)0.51%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)0.39%
Gold Short (DZZ)-0.33%
Vanguard European ETF (VGK)-0.68%
Vanguard Telecom Services ETF (VOX)-0.74%
Proshares Ultrashort Russel2000 (TWM)-3.77%
Proshares Ultrashort NASDAQ Biotech (BIS)-10.13%
Bond Funds1mo %
Vanguard Extended Duration Treasury (EDV)2.18%
Vanguard Mortgage-Backed Securities (VMBS)0.90%
SPDR Barclays Intl. Treasury (BWX)0.85%
[Benchmark] Vanguard Total Bond Index (VBMFX)0.53%
Vanguard Long-Term Bond Index ETF (BLV)0.40%
Dodge & Cox Global Bond Fund (DODLX)0.19%