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December 2019 Performance

January 8, 2020

The stock market was strong in December, particularly abroad, capping off an unexpectedly strong year overall. Low-credit-risk bonds (government-backed and safer corporate debt) were flat to down, although they also had an amazing year as last year's interest rate increases reversed course.

We did fine against our total portfolio Vanguard benchmark last month, mostly from strong performance abroad, but are essentially embarrassed to admit that our Aggressive portfolio was only up 14.98% in 2019, while our Conservative portfolio scored a more respectable 17.63%. Keep in mind the Vanguard S&P 500 Admiral (cheap) class was up about 31.46% and Vanguard STAR a solid 22.21%. We were taking quite a bit less risk than both, is all we can say that's positive about this beating.

Our Conservative portfolio gained 1.43%. Our Aggressive portfolio gained 2.05%. Benchmark Vanguard funds for December 2019 were as follows: Vanguard 500 Index Fund (VFINX), up 3.01%; Vanguard Total Bond Market Index Fund (VBMFX), down 0.15%; Vanguard Developed Markets Index Fund (VTMGX), up 3.49%; Vanguard Emerging Markets Stock Index (VEIEX), up 6.96%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 2.11%.

Our hottest funds last month were investing abroad, including iShares MSCI BRIC Index (BKF), up 8.02%; and Vanguard European ETF (VGK), up 4.51%. Much of this was the dollar drifting lower, as even our foreign bond funds such as Dodge & Cox Global Bond Fund (DODLX) and SPDR Barclays Intl. Treasury (BWX) had decent positive returns—unlike our losses in Vanguard Long-Term Bond Index ETF (BLV), down 1.04%, and Vanguard Extended Duration Treasury (EDV), down 4.55% last month. Other than in bonds, only our inverse funds had losses last month. For the year, it was very difficult for any non-tech-oriented fund in the United States to beat the S&P 500 in 2019, but it was also uncommon for a stock fund category investing anywhere in the world to come in under about a 25% return for the year.

What a difference a year makes! This time last year, a recession seemed imminent, and the stock market briefly saw a roughly 20% decline from the 2019 peak. Along the path of apparent doom, the Federal Reserve reversed course on raising interest rates. The Fed also was ever so slowly shrinking the so-called balance sheet of bonds bought with newly created money post-recession, and went back to letting sleeping dogs lie, presumably to increase this pile of money once again as soon as the economy slips up. The Fed was trying to get ahead of slowly rising inflation in the tax cut and spending—boosted economy but flipped back to recession and deflation-fighting mode.

A few rate cuts later, and investors and apparently the entire global economy were over the 2018 fear. In fact, 2019 turned out to be among the best years for the combined stock and bond markets. The only real weak areas last year were commodities and energy funds, with some specific country funds such as India in low single-digit territory. Shorter-term bonds and cash (which have huge allocations by the investing public, in the trillions) were low-return, but longer-term bonds were up well over 10% in 2019.

The bad news is that all this upside should end as big run-ups late in a bull market often do (1929, 1987, 2000)—and possibly sharply. But there is also a case for some sort of permanently high plateau, to quote an infamously bad call made in 1929 before the crash by famed economist Irving Fisher. The forever-elevated stock market basically lives off of the forever low interest rate environment, where most safe debt and cash globally has a current yield at or below inflation. You almost have to take risk. In such an environment, it will be very difficult for stocks to underperform bonds over the next 10 years: it would take deflation like Japan had. This is very different than 1999, when bonds and cash had high yields and real estate was cheap, and only stocks were overpriced.

Even the slightest shakeup in this global order—like the modest interest rate increases in 2018—and the whole house of cards seems to start coming down. Basically, few can afford higher interest rates, including the highly indebted governments globally, and real estate prices based on payments can't take another 2008-grade hit without causing major headaches all over again. This was the essence of the late 2018 mini bear market.

Other factors at play are the increasing alarming signs of excess in IPO and startup financing, which puts 1999 to shame. WeWork alone probably wasted more money than half the dot-coms of the late 1990s combined. It bought a Gulfstream private jet for about what Pets.com raised in a public stock offering shortly before collapse of the infamous sock puppet Superbowl advertiser. Predicting when the easy money available for growth will dry up is as difficult as knowing when rates will go back up again.

The main positive from these levels is that in theory, interest rates could go even lower, and we could get down around 0%—1% yields on long-term government debt, as many major economies abroad already have. This could push stocks and real estate up even more. Maybe in the future the whole concept of yield will be antiquated: everything will yield under inflation, and the only way to beat inflation will be with capital gains.

Stock Funds1mo %
iShares MSCI BRIC Index (BKF)8.02%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)6.96%
Vanguard European ETF (VGK)4.51%
Vanguard Europe Pacific ETF (VEA)3.56%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)3.49%
Homestead Value (HOVLX)3.39%
Vanguard Utilities (VPU)3.10%
[Benchmark] Vanguard 500 Index (VFINX)3.01%
iShares MSCI Italy Capped (EWI)2.81%
Vanguard Value (VTV)2.65%
iShares Global Telecom ETF (IXP)2.49%
Vanguard Telecom Services ETF (VOX)2.24%
Proshares Ultrashort NASDAQ Biotech (BIS)-2.26%
Gold Short (DZZ)-4.81%
Proshares Ultrashort Russel2000 (TWM)-5.65%
PowerShares DB Crude Oil Dble Short (DTO)-17.75%
Bond Funds1mo %
Dodge & Cox Global Bond Fund (DODLX)1.59%
SPDR Barclays Intl. Treasury (BWX)1.35%
Vanguard Mortgage-Backed Securities (VMBS)0.24%
[Benchmark] Vanguard Total Bond Index (VBMFX)-0.15%
Vanguard Long-Term Bond Index ETF (BLV)-1.04%
Vanguard Extended Duration Treasury (EDV)-4.55%