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October 2023 Performance Review

November 19, 2023

Rising rates impacted nearly all fund categories in October. A global balanced portfolio of stocks and bonds fell harder than the S&P 500, as foreign stocks and global bonds underperformed, with rising rates contributing to the strengthening of the US dollar. Although numbers showing continued progress on inflation in November have so far reversed the downturn experienced in October, speculation about when rates will decrease continues to influence market movements. The housing market, in particular, seems most reliant on the belief that the current higher rates will not persist.

Our Conservative portfolio declined 3.60%, and our Aggressive portfolio declined 3.25%. Benchmark Vanguard funds for October 2023 were as follows: Vanguard 500 Index Fund (VFINX), down 2.11%; Vanguard Total Bond Index (VBMFX), down 1.57%; Vanguard Developed Mkts Index (VTMGX), down 3.56%; Vanguard Emerging Mkts Index (VEIEX), down 3.44%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, down 2.95%.

The average fund category return was negative 2.26% in October, and the average fund category is now up under 1% for 2023. The strong returns are largely in larger-cap US growth stocks this year, as the S&P 500 is still up a solid 10.69% for the year with dividends, even with the drop in October. The only strong areas are risky debt as recession fears slip away, and stocks in Japan. The cryptocurrency bubble just won't die and is the hottest area this year, though still well off the 2021 highs.

With the strength in early November, The S&P 500 index is only about 5% away from all-time highs hit at the end of 2021. The bond market is still down about 20% from the highs, with longer-term government bonds down around 40% — the biggest drop ever.

In our own portfolios, what little gains we had in short funds were more than wiped out by drops in all stock funds and our long-term bond funds. The rising dollar particularly hit Franklin FTSE Germany (FLGR) hard with a 6.1% drop, and took down iShares JP Morgan Em. Bond (LEMB) 4.18%, a riskier debt fund that has actually done well relative to safe debt in recent years. Rising rates drove Vangaurd L/T Treasury (VGLT) down 7.31% and a whopping 11.41% hit to Vanguard Extended Duration Treasury (EDV). Rising rates have

Stocks are joining real estate in being priced as if the economy isn't going to slow down, inflation is heading back to target levels of around 2% a year, and interest rates will probably head down to around 3%. This could happen, but if it doesn't, there will be problems. Bubbling problems in commercial real estate also can't spread to the broader real estate market, much less the economy. Any deviation from this expectation will likely lead to lower real estate prices and stocks, but possibly higher bond prices as rates go down. The worst case for bonds is inflation settling into 3-4% as a new normal, the economy remains solid, real estate and stocks are okay with it as the Fed doesn't want to risk a crash and is comfortable with 5%-ish rates, and long-term rates go up to over 6% hurting bond prices again.

At this point in bond versus stock valuations, bonds offer a compelling risk-reward almost as good as in 2000 when stocks were a bit more pricey and bonds yielded closer to 6%, not 5%. There has been money going into longer-term bond funds lately, so investors aren't panic selling bonds after the losses, which would be the case if bonds were a true bargain today.

The renewed speculative energy by crypto and stock investors is a tough part of the economy to cool down with higher rates. The Fed faced the same problem in the 1920s when they raised rates not to cool inflation — which was low — but to cool speculation. When investors get it in their heads that stocks and real estate can't go down over a few years — reinforced by recent history — it doesn't matter if rates are 3% or 8%. Until it matters all of a sudden, as was the case in 1929.

Stock Funds 1mo %
ProShares UltraShort QQQ (QID) 11.43%
ProShares Decline of Retail (EMTY) 7.39%
Proshares Short High Yld (SJB) 2.06%
Franklin FTSE Brazil (FLBR) -0.65%
LeatherBack L/S Alt. Yld. (LBAY) -1.75%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX) -2.06%
Franklin FTSE Japan ETF (FLJP) -2.36%
Invesco CurrencyShares Euro (FXE) -2.37%
VanEck Vectors Pharma. (PPH) -2.49%
Homestead Value Fund (HOVLX) -2.61%
Proshares Short Bitcoin (BITI) -2.86%
Vanguard Value Index (VTV) -3.27%
Franklin FTSE China (FLCH) -3.53%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX) -3.71%
Vanguard FTSE Developed Mkts. (VEA) -3.78%
Vanguard Communications ETF (VOX) -3.86%
Vangaurd All-World Small-Cap (VSS) -4.25%
Vanguard FTSE Europe (VGK) -4.49%
[Benchmark] Vanguard 500 Index (VFINX) -4.77%
Franklin FTSE South Korea (FLKR) -5.12%
Franklin FTSE Germany (FLGR) -6.10%
UltraShort Bloom. Crude Oil (SCO) -9.81%
Bond Funds 1mo %
BondBloxx Six Month Treasury ETF (XHLF) 0.38%
[Benchmark] Vanguard Total Bond Index (VBMFX) -2.49%
iShares JP Morgan Em. Bond (LEMB) -4.18%
Vanguard Long-Term Bond Index ETF (BLV) -6.31%
Vangaurd L/T Treasury (VGLT) -7.31%
Vanguard Extended Duration Treasury (EDV) -11.41%