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February 2022 Performance Review

March 8, 2022

Just when it felt like we were exiting one global economic problem, we're confronted with another. Within just a few days, the Russia—Ukraine war has already decimated Russian stocks and now seems to be spreading into other markets, notably Germany, the most strongly linked economically to Russia, likely foreshadowing economic problems to come. The S&P 500 was down 3%, and with the action in early March is down over 10% for the year, joining other markets and indexes already down that much or more. Bonds were weak as well, particularly foreign and emerging markets bonds. Once again, bonds offer no offsetting gains from falling stocks, just less downside. Such is the dilemma of low rates.

Our Conservative portfolio declined 2.21% and our Aggressive portfolio declined 1.63%. Benchmark Vanguard fund movements in February 2022 were as follows: Vanguard 500 Index Fund (VFINX), down 2.99%; Vanguard Total Bond Index (VBMFX), down 1.13%; Vanguard Developed Mkts Index (VTMGX), down 2.47%; Vanguard Emerging Mkts Index (VEIEX), down 4.27%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, down 2.42%.

Our Aggressive portfolio did well against the market for the month and is doing well for the year. But our Conservative portfolio, without the benefit of shorts and with too much exposure to Europe, given the rising risks in the region, fell by almost as much as the broader market. At the end of February the S&P 500 was down 8.02% in 2022 (with dividends, as measured by the Vanguard 500 fund) while our Conservative portfolio was down 5.03% and our Aggressive portfolio just 2.52%.

It was a month in which we wished we still owned our energy fund, as that fund category's 20% return was about the only strong area in the global market last month. The second best area was Latin American stocks, which we do own. They are an energy and commodity play of sorts, though this region is falling with emerging markets now.

Energy is at the center of this crisis. Europe is not really capable of getting by without Russian oil and gas, given the tight supplies and strong economies globally. Everything that goes in and out of Russia seems liable to attract punishing sanctions, except its primary source of revenues — energy. Limited sanctions won't keep Russian commodities off the market entirely anyway, they'll just be sold to different buyers.

Our dollar has climbed, as it often does during a crisis, which hurts foreign investment returns. This will eventually create even better opportunities to invest abroad. It is possible we will cut back on European stocks and increase our foreign stock stakes in coming weeks or months, but the timing will be a crapshoot. China was weak, as were emerging market stocks and bonds. Nobody knows where economic contagion will appear.

It is noteworthy that the last time Russia had a financial crisis, in 1998, it wasn't the hit to the Russian stock market that was the issue so much as hedge funds that were gambling on risky debt. It ultimately led to a bailout of sorts, orchestrated by the Federal Reserve, and a brief but significant slide in stocks worldwide.

Unlike Russia, which has been shoring up its finances for years in preparation for trouble (apparently of its own making), America and Europe borrowed and spent to support the last crisis. The notion of supporting another recession this soon is not in the financial cards. Another wild card is the Federal Reserve, which until a few weeks ago was going to raise interest rates to end the worst inflation in decades. Before this latest slide, U.S. stocks were actually rebounding on hopes we don't get a rate increase because of the Russia situation, as if slightly lower rates can magically support stocks regardless of serious global economic problems. The case can be made that rates should go higher, to slow the economy and inflation and drive energy and commodity prices down.

There will be some opportunities but this problem is likely to get worse before it gets better. Most high-flying, low earnings growth stocks were already down around 50% from their peaks last year. This new trouble is driving down the rest of the global market.

Stock Funds1mo %
ProShares UltraShort QQQ (QID)6.70%
Franklin FTSE Brazil (FLBR)3.94%
ProShares Decline of Retail (EMTY)3.08%
Franklin FTSE South Korea (FLKR)0.45%
VanEck Vectors Pharma. (PPH)-0.18%
Invesco CurrencyShares Euro (FXE)-0.32%
Vanguard Value Index (VTV)-1.15%
Franklin FTSE Japan ETF (FLJP)-1.44%
Homestead Value Fund (HOVLX)-1.86%
Vanguard Utilities (VPU)-1.87%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)-2.47%
Vanguard FTSE Developed Mkts. (VEA)-2.65%
[Benchmark] Vanguard 500 Index (VFINX)-2.99%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)-4.27%
Vanguard FTSE Europe (VGK)-5.29%
Franklin FTSE China (FLCH)-5.81%
Franklin FTSE Germany (FLGR)-8.86%
Bond Funds1mo %
Vanguard Mortgage-Backed Securities (VMBS)-1.08%
[Benchmark] Vanguard Total Bond Index (VBMFX)-1.13%
Vanguard Extended Duration Treasury (EDV)-2.52%
Vanguard Long-Term Bond Index ETF (BLV)-2.60%
iShares JP Morgan Em. Bond (LEMB)-4.23%