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June 2023 Performance Review

July 5, 2023

The stock market is now up over 20% from the lows last year, officially entering a bull market, though still down around 7% from the highs of early 2022. The market is being driven by mega-cap growth stocks, fueled by optimism surrounding a new tech bubble of artificial intelligence and a Federal Reserve pause in rapid rate increases. Inflation is subsiding but remains well above the 2% target. Bonds have barely moved upwards for the year.

Our Conservative portfolio gained 2.41%, and our Aggressive portfolio rose by 3.47%. Benchmark Vanguard funds for June 2023 were as follows: Vanguard 500 Index Fund (VFINX) was up 6.60%; Vanguard Total Bond Index (VBMFX) was down 0.38%; Vanguard Developed Mkts Index (VTMGX) was up 4.44%; Vanguard Emerging Mkts Index (VEIEX) was up 4.30%, and Vanguard Star Fund (VGSTX), a total global balanced portfolio, was up 3.80%.

Considering our heavy exposure to value stocks and bonds, we're surprised to be at least in the ballpark of the Vanguard benchmark total global portfolio fund. This is despite the tech and large-cap growth market quickly outpacing us.

Much of the optimism is centered on a new tech stock boom, driven by existing AI developments. It remains unclear how the rest of the economy will fare if AI dreams come true. Individual stock speculation is making a comeback, along with crypto speculation — the bubble that just won't burst. Fund investors have mostly been exiting stocks since last summer — a move which seemed to indicate that stocks were in a good place. However, we didn't take advantage because rates were high enough to be a good alternative to stocks. In June, fund investors started returning to stocks in the most significant numbers since the market peak in early 2022.

If the 2022 bear market was 'fixed' with 1% fed rates, we probably would have jumped into stocks as well. But the allure of a 5%+ risk-free rate was too compelling. This may prove too risk-averse, especially if inflation drops and the Fed lowers rates.

Stocks in the early 2000 internet bubble were at roughly the current high valuations and cash yields were about the same in the 5-6% range. From that point, stocks only returned just under 7% a year with dividends.

Will the AI boom make up for current high prices? Unlikely, as the 2000 bubble was essentially pre-internet and smartphone boom. Plus, we now have more government debt relative to GDP, limiting opportunities to boost the economy. We're sticking with cash and bonds for now.

Our only really successful recent buy was Vanguard Communication ETF (VOX) last year. Although it continued to fall until November, it's now up around 13% on fast-rising big-cap tech stocks that comprise part of the fund. The fund was up 4.75% for the month and 29.67% for the year. The S&P 500 outperformed around 90% of the 100+ fund categories once again, and beat all of our funds except Franklin FTSE Brazil (FLBR), which was up 15.01% for the month. Inflation-oriented and commodities investments are still lagging this year, but this region is doing well. Conversely, Franklin FTSE China (FLCH) is down almost 5% for the year, even after a positive 3.95% month.

There's no way to predict how far this new tech bubble will go. In theory, it's at the early stages, and there's much more money that could flow back into stocks. It seems the Fed would consider speculative mania too close to an inflation fight and, even if they don't raise rates, the Fed probably won't lower rates with rocketing crypto and tech. The future largely depends on the real estate sector, which has held up despite near 7% mortgages. The mini bank panic is now in the rear-view mirror, but questionable loans haven't really gone bad yet.

This effectively summarizes our current strategy: we're sticking with our holdings in what might be seen as unexciting value and bonds. We're considering a few minor adjustments, such as potentially reducing our stock holdings and increasing our cash reserves. The rising trend in tech and AI development is intriguing, but it could just be the precursor to a new bubble that might burst quickly, similar to the pre-2000 internet bubble — only now we're already in a valuation zone akin to late 1999. Even with rate increases stopping for good at around 5% and AI turning out to be far more than just cool chats, future returns likely won't beat those from 2000 to now.

Stock Funds 1mo %
Franklin FTSE Brazil (FLBR) 15.01%
[Benchmark] Vanguard 500 Index (VFINX) 6.60%
Homestead Value Fund (HOVLX) 6.45%
Vanguard Value Index (VTV) 6.13%
Franklin FTSE Japan ETF (FLJP) 4.96%
LeatherBack L/S Alt. Yld. (LBAY) 4.81%
Vanguard Communications ETF (VOX) 4.75%
Vanguard FTSE Developed Mkts. (VEA) 4.46%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX) 4.44%
Vanguard FTSE Europe (VGK) 4.33%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX) 4.30%
Vangaurd All-World Small-Cap (VSS) 4.13%
VanEck Vectors Pharma. (PPH) 4.12%
Franklin FTSE China (FLCH) 3.95%
Invesco CurrencyShares Euro (FXE) 2.26%
Franklin FTSE Germany (FLGR) 1.76%
Franklin FTSE South Korea (FLKR) 0.59%
NightShares 2000 (NIWM) 0.04%
Proshares Short High Yld (SJB) -1.24%
ProShares Decline of Retail (EMTY) -8.30%
UltraShort Bloom. Crude Oil (SCO) -11.16%
ProShares UltraShort QQQ (QID) -11.30%
Proshares Short Bitcoin (BITI) -12.55%
Bond Funds 1mo %
iShares JP Morgan Em. Bond (LEMB) 1.59%
Vanguard Long-Term Bond Index ETF (BLV) 1.04%
Vanguard Extended Duration Treasury (EDV) 1.01%
Vangaurd L/T Treasury (VGLT) 0.02%
[Benchmark] Vanguard Total Bond Index (VBMFX) -0.38%