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September 2019 Performance Review

October 3, 2019

Economic expectations drifted back up somewhat, sending interest rates and stocks higher, but there is still significant fear the next recession is not far away. There are also percolating fears that, globally, central banks are not going to have an answer for the next downturn besides creating more money—a path that may be limited by inflation higher than experienced over much of the last decade. There just doesn't seem to be a way to get out of high levels of borrowing made by basically everyone at low rates. Even with the weak month for bonds, we had a decent month relative to benchmarks.

Our Conservative portfolio gained 0.22%. Our Aggressive portfolio rose 1.00%. Benchmark Vanguard funds for September 2019 were as follows: Vanguard 500 Index Fund (VFINX), up 1.86%; Vanguard Total Bond Market Index Fund (VBMFX), down 0.60%; Vanguard Developed Markets Index Fund (VTMGX), up 3.09%; Vanguard Emerging Markets Stock Index (VEIEX), up 1.33%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 0.90%.

The fear-buying of gold this year reversed last month as interest rates climbed. Oil also drifted down, as the economy globally just isn't strong enough for high oil prices. The levels we are at now basically require political problems in oil countries, of which there are plenty to go around. Value stocks seem to be taking the lead and European stocks did well, arguably because they are basically value stocks now. Small cap is doing well. There are more than a few signs that investors have overindulged on growth stories. Money-losing startups that own $60 million dollar private planes to jet founders between their different houses as well as business opportunities are on that list. We are going to have to make some adjustments soon.

The third trouble area (after global economic weakness and concerns that central banks are running out of options) is the current political issues facing the Whitehouse. In general, an impeachment event doesn't have much significant sway in the markets' longer run (and didn't in the late 1990s), but in theory it could send the country down a path where higher taxation isn't just required for budget reasons—we are already there—but more for punishment reasons or for elevated desires to redistribute wealth more than has already been done by the progressive tax code. More of a danger to markets is what the White House will do while under heat — this recent news of tariffs against European countries comes to mind.

Undoing the recent corporate tax cut by itself would likely lead to a large adjustment to stock prices that are now priced on higher after-tax profits. This won't be a major crash, as prices probably never really went up as much as possible because, in investors' eyes, the corporate tax cut was never going to be forever in full anyway. It doesn't help that the President warns of a market crash if he doesn't get his way on the off-chance he does not.

Collectively, none of these concerns would be particularly worrisome if we weren't already at very elevated valuations in stocks, and now bonds—and probably real estate, while you are at it. There is not much room for error. Interest rates are probably going to stay low globally for a long time. So, for the time being, if the economy stays reasonably strong, we can just stay in a high valuation world. What we don't need is a reason for investors to want out.

Stock Funds1mo %
Gold Short (DZZ)7.31%
Proshares Ultrashort NASDAQ Biotech (BIS)6.09%
PowerShares DB Crude Oil Dble Short (DTO)4.42%
Vanguard Value (VTV)3.46%
Vanguard Utilities (VPU)3.30%
Vanguard Europe Pacific ETF (VEA)3.16%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)3.09%
Homestead Value (HOVLX)2.88%
Vanguard European ETF (VGK)2.55%
iShares MSCI Italy Capped (EWI)2.45%
[Benchmark] Vanguard 500 Index (VFINX)1.86%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)1.33%
iShares MSCI BRIC Index (BKF)1.05%
iShares Global Telecom ETF (IXP)0.25%
Vanguard Telecom Services ETF (VOX)-0.54%
Proshares Ultrashort Russel2000 (TWM)-4.53%
Bond Funds1mo %
Dodge & Cox Global Bond Fund (DODLX)0.54%
Vanguard Mortgage-Backed Securities (VMBS)0.13%
[Benchmark] Vanguard Total Bond Index (VBMFX)-0.60%
SPDR Barclays Intl. Treasury (BWX)-1.01%
Vanguard Long-Term Bond Index ETF (BLV)-1.94%
Vanguard Extended Duration Treasury (EDV)-4.07%