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April 2021 Performance Review

May 5, 2021

It was the best of times, it was the best of times. The only thing that seems capable of burning investors now is just that: too many good times. The S&P 500 was back in the top 10% of the entire universe of over 100 fund categories, and in the top 15% for the year. Our portfolio saw more of our funds underperforming the index as well.

Our Conservative portfolio gained 2.27% and our Aggressive portfolio gained 1.98%. Benchmark Vanguard fund performances for April 2021 were as follows: Vanguard 500 Index Fund (VFINX), up 5.33%; Vanguard Total Bond Index (VBMFX), up 0.95%; Vanguard Developed Mkts Index (VTMGX), up 3.17%; Vanguard Emerging Mkts Index (VEIEX), up 1.86%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 3.17%.

The S&P's continuing outperformance seems like proof of why the S&P 500 is the best investment, relative to other funds. You will get no beef here about the long-term benefit of low fees and passive management. However, this sort of outperformance is more akin to the experience of the late 1990s, when investors piled into the U.S. growth winners during the years of outperformance. Ultimately this led to a stock market crash, with the S&P 500 underperforming most global fund categories for the next several years.

The end of U.S. large-cap growth and tech dominance may already be here. In that respect, it is just like early 2000. There is no saying what will be the cause of the decline, or just the rotation to other types of stocks (or increasingly — gulp — crypto-collectibles).

Many inflation-oriented fund categories that could benefit from rising inflation had a good month; precious metals, real estate, commodities, and energy partnerships were all near the top of the list. Nothing was down except for Japan funds, India, and surprisingly, energy stock funds such as we now own. However, they are still in the top 3% of fund categories for the year, with returns of over 20%.

Our only real standout was Franklin FTSE Brazil (FLBR), with a 6.46% return. The only loser was Franklin FTSE China (FLCH), down 0.18%. Bond rates drifted down, pushing most bonds up even with the threat of an overheating economy. Our recently re-added Vanguard Extended Duration Treasury (EDV) was up 2.87%, followed by iShares JP Morgan Em. Bond (LEMB), up 1.89%, pushed by a higher risk appetite.

There is certainly fear of missing out on the next leg of the boom as we come out of the Covid lockdown. But optimism can quickly turn. Psychologically, it could just be a fear of losing gains in hot areas, or it could be the temptation of higher-returning speculations beating old winners — trade in the Tesla stock for crypto.

More a fundamental factor than an emotion one to the triggering of a market slide would be the Fed increasing interest rates, to counter the solid boost to an already accelerating economy of another significant stimulus program, if passed. A few years back the Fed did the opposite. The Federal government wasn't doing much deficit spending to boost a still sluggish post-2009 economy, so the Fed did all the heavy lifting — low rates and money creation through so-called quantitative easing or QE. It did the same thing last year, with the extra boost of massive government spending.

Does it make sense to continue to run massive deficits this far into a recovery? An enormous infrastructure plan could be mothballed for the next recession, so they have a ready-to-go (shovel-ready…) jobs and stimulus program, rather than a panic stimulus during a crisis resulting in questionable grants and checks in the mail. If we start an infrastructure stimulus program now, will we have less money to burn when we need it? Will we create more demand for labor and materials in a booming post-Covid economy, and cause increased traffic and energy waste? Why didn't we attend to the infrastructure late in the Covid economic slowdown after the initial hard shutdowns? We already see shortages and price booms in many materials key to growth, and could worsen the problem. Perhaps an on-deck plan doesn't take the nuances of a current crisis, be it real estate or pandemic, but infrastructure seems somewhat perennial.

The current Treasury Secretary and former Chair of the Federal Reserve just slipped, and said aloud that the Fed might have to raise rates to cool the economy in the face of more government spending. The market didn't seem to like it, even though she quickly toned down the message.

The other looming threat to the party is higher taxes. While this future drag is far off, investors' behavior may already be changing in anticipation of significant tax changes. Muni bond yields are at historic lows relative to treasuries, as investors expect even better after-tax returns as rates go up. If favorable capital gains taxes will increase to ordinary income tax levels, which themselves are going up, will investors try to book gains while rates are low? Or will they have to wait, as such changes can be retroactive to the beginning of the year? Perhaps the dumping hour will be late this year, before any actual tax changes are passed with the presumption they are coming in 2022. With such low rates, are large investors using margin loans to avoid booking gains, and will that party end if rates go up? Or will interest rates stay low, with high capital gains rates leading to more extended holding periods — like forever, as investors with significant gains wait for lower rates, years down the road? Perhaps we will get a bigger stock boom, as nobody with capital gains wants to sell and pay 50% taxes on the gains, State and Federal.

The more predictable part is that corporate tax rates will likely climb, which can only lower corporations' after-tax profits, making their current valuations even higher.

Stock Funds1mo %
Franklin FTSE Brazil (FLBR)6.46%
[Benchmark] Vanguard 500 Index (VFINX)5.33%
Homestead Value Fund (HOVLX)5.23%
Vanguard FTSE Europe (VGK)4.78%
Vanguard Small-Cap Value (VBR)4.01%
Vanguard Utilities (VPU)3.78%
Franklin FTSE Germany (FLGR)3.56%
Vanguard Value Index (VTV)3.44%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)3.17%
Vanguard FTSE Developed Mkts. (VEA)3.05%
Invesco CurrencyShares Euro (FXE)2.47%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)1.86%
VanEck Vectors Pharma. (PPH)1.24%
Franklin FTSE South Korea (FLKR)1.23%
Vanguard Energy (VDE)0.43%
Franklin FTSE China (FLCH)-0.18%
Bond Funds1mo %
Vanguard Extended Duration Treasury (EDV)2.87%
iShares JP Morgan Em. Bond (LEMB)1.89%
Vanguard Long-Term Bond Index ETF (BLV)1.82%
[Benchmark] Vanguard Total Bond Index (VBMFX)0.95%
Vanguard S/T Infl. Protect. (VTIP)0.87%