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April 2019 Performance Review

May 3, 2019

The stock market has recovered all of the losses since the previous peak in late September 2018. This quick reversal was largely because interest rates are now lower than last year, and the Federal Reserve will not spark the next recession by raising rates, as inflation is mild at best.

The U.S. economy, and now much of the world, seems not to be sliding into an economic slowdown. These are good reasons for the market not to drop by more than the 20% it fell late last year, but not really good enough reasons for new record highs.

Our Conservative portfolio gained 1.24% in April. Our Aggressive portfolio rose 1.31%. Benchmark Vanguard funds for April 2019 performed as follows: Vanguard 500 Index Fund (VFINX), up 4.04%; Vanguard Total Bond Market Index Fund (VBMFX), up 0.04%; Vanguard Developed Markets Index Fund (VTMGX), up 2.90%; Vanguard Emerging Markets Stock Index (VEIEX), up 2.08%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 2.61%.

With bonds weak in April and with a relatively low stock exposure, we had a hard time keeping pace with benchmarks. While stocks worldwide have been strong this year, foreign markets (unlike the U.S. market) are still below their peaks of early 2018 and are actually not far from their pre-crash 2007 levels. The U.S market, if we include dividends, has more than doubled from its pre-crash 2007 highs.

Much of this lackluster decade-plus return abroad has been due to a rising U.S. dollar, but better U.S. economic growth and more dynamic growth companies — and now a corporate tax cut — play a big part in the U.S. market's relative strength, as well as the strong dollar. Our interest rates are also significantly higher than those in foreign markets, which attracts capital, which boosts our currency. In 2008, one euro was worth about $1.60. Lately it has been kicking around $1.12, which is around a 30% decline.

Given the current low valuations abroad and the potential for the dollar to slowly slide over the next decade, returns from abroad should be higher. The problem with this forecast is that it is fairly popular, and there is still more money going into foreign funds than into domestic stock funds, though much of this is from rebalancing into the underperforming stock category. The euro can go lower too; it was worth only $0.80 back in 2002, before the big run up in foreign stocks.

Investors' money hasn't returned to stocks even though prices have rebounded. Stock buybacks from companies are probably a bigger driver than mutual funds and ETFs now. Money flows to stock funds in 2018, U.S. and foreign combined, were negative by about $50 billion — and turned negative for the year only in December 2018, right before the market took off.

Flows this year are still flat to slightly negative; investors aren't buying into it, and that is probably the best single sign for stocks at these elevated levels. Investors put in much more in early 2018, at the start of a rocky year. The actual investor return in the market has been worse than the market because of poorly timed investments, as is often the case.

In funds in April the telecom sector was hot, largely because of technology shares that have been infiltrating the holdings of these formerly conservative dividend-oriented funds. Facebook and its ilk have recovered nicely this year, boosting these funds. As a reference to how much these funds have changed, our holding Vanguard Telecom Services ETF (VOX), up 6.06% last month, now yields just over 1% compared to the Vanguard 500's roughly 1.9% yield. Traditionally, telecom funds have had higher yields than the market. AT&T has a roughly 6% dividend yield, and Verizon yields over 4%. Our newer global telecom fund, iShares Global Telecom ETF (IXP), up 5.17% last month, has seen the dividend yield drop by half as well, thanks to Facebook and Google pushing Verizon and AT&T to new lower allocations in the portfolio. We expect to exit these funds soon.

In bonds, all our holdings were down except our relatively new holding Dodge & Cox Global Bond Fund (DODLX), up 0.93%, as riskier bonds and some foreign bonds had a decent month relative to safer longer-term bond funds that take less credit risk.

The bottom line is that we may have dodged an economic bullet. Our current tax cuts and low interest rates may have coincided with an economic slowdown and essentially acted as a stimulus to avoid a slowdown, if not a full recession. This doesn't guarantee no more big slides in stocks or much higher highs, and most bear markets start well before recessions start anyway. Avoiding a recession and starting a new bull market are two different things.

We still have an epic boom in technology that will have to cool down at some point. It might make sense to hide in foreign value stocks, far away from the domestic craziness in growth stocks. On the plus side, investors are not that enthusiastic about U.S. stocks, and that usually means the market will be fine.

Stock Funds1mo %
Proshares Ultrashort NASDAQ Biotech (BIS)9.71%
Vanguard Telecom Services ETF (VOX)6.06%
iShares Global Telecom ETF (IXP)5.17%
Vanguard Value (VTV)4.06%
[Benchmark] Vanguard 500 Index (VFINX)4.04%
Vanguard European ETF (VGK)3.92%
Vanguard Europe Pacific ETF (VEA)3.27%
Homestead Value (HOVLX)2.99%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)2.90%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)2.08%
Gold Short (DZZ)1.98%
iShares MSCI Italy Capped (EWI)1.80%
iShares MSCI BRIC Index (BKF)1.16%
Vanguard Utilities (VPU)0.86%
Proshares Ultrashort Russel2000 (TWM)-6.26%
PowerShares DB Crude Oil Dble Short (DTO)-11.54%
Bond Funds1mo %
Dodge & Cox Global Bond Fund (DODLX)0.93%
[Benchmark] Vanguard Total Bond Index (VBMFX)0.04%
Vanguard Mortgage-Backed Securities (VMBS)-0.10%
SPDR Barclays Intl. Treasury (BWX)-0.55%
Vanguard Long-Term Bond Index ETF (BLV)-0.60%
Vanguard Extended Duration Treasury (EDV)-3.00%