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January 2020 Performance Review

February 6, 2020

The global stock and bond markets went back into recession fear mode after a great 2019. Some of this was fear of the currently spreading coronavirus. As our portfolios are fairly well positioned for an environment where investors expect an economic slowdown, we beat all the benchmarks in January. This lower risk position also explains our relative underperformance last year.

Our Conservative portfolio gained 1.75%. Our Aggressive portfolio gained 0.49%. Benchmark Vanguard fund performances in January 2020 were as follows: Vanguard 500 Index Fund (VFINX), down 0.04%; Vanguard Total Bond Market Index Fund (VBMFX), up 2.11%; Vanguard Developed Markets Index Fund (VTMGX), down 2.76%; Vanguard Emerging Markets Stock Index (VEIEX), down 5.05%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 0.18%.

In general, global health scares are not a huge market event, but past contagions occurred when the stock market was less expensive, so the past may not be a good indication of the future. A more relevant factor is that China used to constitute a relatively small part of the global economy, and that is no longer the case. When the SARS coronavirus broke out in 2002, China had a 4% share of global GDP. Today, it is around 16%. Factor in the drag of the trade war, and really, anything can happen.

Oil reversed sharply during this rough month, pushing up our inverse fund PowerShares DB Crude Oil Dble Short (DTO) by 28%. Not including our short funds, our best performer was Vanguard Utilities (VPU) which delivered a particularly strong 6.77% return as interest rates were sliding and money was shifted to safer investments benefiting higher yield and generally safer utility stocks. Everything else on the stock side was either up slightly or down. International markets were particularly weak, with losses in the 3—6% range, notably in emerging markets with China exposure. Our own iShares MSCI BRIC Index (BKF) was our worst performer: down 5.19%. Oil wasn't the only weak commodity; all commodities were down, which sort of makes sense, as China is the biggest consumer of many commodities.

Bonds did well, notably the longer-term investment grade bonds we own, that tend to be where investors go in a panic. We're still worried that this party is almost over, but there could be one good move up (rates down) if and when we fall into our next recession. At the top of the list was Vanguard Extended Duration Treasury (EDV), up 10.32% for the month. Long-term government bonds were the number one fund category last month, followed by utilities, followed by long-term bonds. This largely explains our relatively good returns in January compared to the benchmarks.

In the last couple of days this scare seems to be leaving the markets faster than it appeared. This is because there is so much money in the system. Speaking of...what really got the reversal going in stocks was not news that China found a virus cure, but found a cure for the market — they basically lowered rates and injected over a hundred billion into the economy. It's the solution for all that ails you.

The more surprising event of recent days that didn't get much attention was Tesla stock doing a 1990s and going parabolic, as all the funds shorting the stock had to get out of the way . This took Tesla to a higher market cap than any other auto company in the world except Toyota, and Tesla almost passed Toyota's roughly $200 billion dollar market value to become #1 before plunging 17% in a day. For the record, Toyota has over 10 times the revenue of Tesla. This sort of exuberance by stock investors is more of a worry than the coronavirus.

Stock Funds1mo %
PowerShares DB Crude Oil Dble Short (DTO)28.16%
Proshares Ultrashort NASDAQ Biotech (BIS)12.35%
Proshares Ultrashort Russel2000 (TWM)6.77%
Vanguard Utilities (VPU)6.10%
Gold Short (DZZ)0.94%
Vanguard Telecom Services ETF (VOX)0.62%
iShares Global Telecom ETF (IXP)0.29%
[Benchmark] Vanguard 500 Index (VFINX)-0.04%
Homestead Value (HOVLX)-2.06%
iShares MSCI Italy Capped (EWI)-2.44%
Vanguard Value (VTV)-2.50%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)-2.76%
Vanguard Europe Pacific ETF (VEA)-3.00%
Vanguard European ETF (VGK)-3.09%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)-5.05%
iShares MSCI BRIC Index (BKF)-5.19%
Bond Funds1mo %
Vanguard Extended Duration Treasury (EDV)10.32%
Vanguard Long-Term Bond Index ETF (BLV)5.32%
[Benchmark] Vanguard Total Bond Index (VBMFX)2.11%
Dodge & Cox Global Bond Fund (DODLX)1.08%
Vanguard Mortgage-Backed Securities (VMBS)0.66%
SPDR Barclays Intl. Treasury (BWX)0.42%