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January 2023 Performance Review

February 7, 2023

Stocks and bonds rebounded sharply in January as investors upped bets on a so-called soft landing in the economy. Expectations of falling inflation without a serious recession led to a flurry of dip buying, notably in the hardest-hit areas of last year. Falling longer-term interest rates pushed up bond prices but imply low inflation and probably a recession are in the cards. Economic numbers are by and large very good, considering how fast interest rates have risen, but then it takes time for rate increases to help start a recession, historically.

Our Conservative portfolio gained 5.80%, and our Aggressive portfolio gained 5.58%. Benchmark Vanguard funds for January 2023 were as follows: Vanguard 500 Index Fund (VFINX), up 6.28%; Vanguard Total Bond Index (VBMFX), up 3.19%; Vanguard Developed Mkts Index (VTMGX), up 8.65%; Vanguard Emerging Mkts Index (VEIEX), up 7.77%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 7.20%.

With the dramatic rebound in January, our portfolios clawed back a good chunk of last year’s losses all in one month. This third rebound attempt since the stock and bond market turned way down just over a year ago might already be petering out. The economy is looking a little too hot, which could keep the Federal Reserve in inflation red-alert mode. With the latest rate hike, we’re just under 5% on safe risk-free cash, which somehow hasn’t crashed the economy, housing, or stock market so far. The expectation is these rates won’t last, so why load up the truck on cash?

One reason for the excitement is that longer-term rates have been heading down since October, which is why bond funds are doing well again after 2022 proved to be the worst calendar year for investment-grade debt pretty much ever. In theory, if the economy wasn’t going to slow down much and this was a great time to buy stocks after last year’s dip, interest rates would be flat or moving up. Bonds are saying recession; stocks are saying no recession. It is possible there is some sort of Goldilocks economy market scenario where longer- term rates are 2–3%, inflation down to 2%, and the economy and stocks are strong.

At the top of our hits was recently added Vanguard Communication ETF (VOX), up 15.02% as investors piled into hard-hit tech and communications stocks, pushing this category to the top 3% of all fund categories last month. The US dollar is weakening after a strong year on expectations our rates are not going any higher. This, plus bargain shopping, led to many foreign funds rising more than the S&P 500; notably Franklin FTSE Germany (FLGR), Franklin FTSE China (FLCH), and Franklin FTSE South Korea (FLKR) up over 13% as a group.

Value stocks did very well compared to growth stock in 2022. While both were down, growth stocks were down around 33% while value stocks were down around 2%. This 31% performance gap is the largest on record since the unwinding of the dot com bubble in 2000. The years 2022 and 2000 are the biggest gaps since at least the late 1970s. As it turns out, during a stock boom, investors flock to growth stories and overpay.

So far in 2023 this trend is reversing, with growth leading the way by far. It is too soon to tell if the relative bottom is in in growth stocks. It is just as possible that both will fall more together as the growth fluff is gone, but the overall market is still pricy relative to now high interest rates.

Our value- and dividend-oriented holdings performed poorly last month, with VanEck Vectors Pharma. (PPH) up just 0.77% and our value funds Homestead Value Fund (HOVLX) and Vanguard Value Index (VTV) both up only about half as much as the S&P 500. The real drags were our shorts; notably, Proshares Short Bitcoin (BITI) down 30% as deluded gamblers—or visionaries, depending on your opinion of digital currencies—piled back into Bitcoin after a collapse in 2022. Digital “asset” funds (an oxymoron) were up around 40% last month but are still down 44% over the last 12 months and are negative over the past 5 years. The only real weak areas in January were utilities funds, down fractionally, and funds that invest in India, also down slightly.

We even had big gains in rate-sensitive bonds, with Vanguard Extended Duration Treasury (EDV) up 10.18%, Vanguard Long-Term Bond Index ETF (BLV) up 7.26%, and Vangaurd L/T Treasury (VGLT) up 7.14%. Both have a long way to go to regain old highs; in fact, they may never hit old highs unless rates plunge anew. That said, we’re also enjoying the higher yields now. The worst thing for bonds would be some sort of panic selling in the bond market if investors decide we can’t get inflation or deficit spending under control. We’re considering adding back inflation-adjusted bond funds, as pricing is now favorable compared to Series I bonds purchased directly from the Treasury.

Stock Funds1mo %
Vanguard Communications ETF (VOX)15.02%
Franklin FTSE Germany (FLGR)13.70%
Franklin FTSE China (FLCH)13.37%
Franklin FTSE South Korea (FLKR)12.94%
Vanguard FTSE Europe (VGK)9.56%
Vanguard FTSE Developed Mkts. (VEA)9.03%
Vangaurd All-World Small-Cap (VSS)8.76%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)8.65%
Franklin FTSE Brazil (FLBR)8.36%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)7.77%
Franklin FTSE Japan ETF (FLJP)7.32%
[Benchmark] Vanguard 500 Index (VFINX)6.28%
Vanguard Value Index (VTV)2.79%
Homestead Value Fund (HOVLX)2.68%
Invesco CurrencyShares Euro (FXE)1.58%
NightShares 2000 (NIWM)1.40%
VanEck Vectors Pharma. (PPH)0.77%
UltraShort Bloom. Crude Oil (SCO)0.55%
LeatherBack L/S Alt. Yld. (LBAY)0.37%
Proshares Short High Yld (SJB)-3.26%
ProShares Decline of Retail (EMTY)-7.02%
ProShares UltraShort QQQ (QID)-18.56%
Proshares Short Bitcoin (BITI)-30.18%
Bond Funds1mo %
Vanguard Extended Duration Treasury (EDV)10.18%
Vanguard Long-Term Bond Index ETF (BLV)7.26%
Vangaurd L/T Treasury (VGLT)7.14%
iShares JP Morgan Em. Bond (LEMB)3.54%
[Benchmark] Vanguard Total Bond Index (VBMFX)3.19%