The election is over, and investors in the U.S. stock market seem to like the results. Investors in everything else—namely foreign stocks and bonds—aren’t as happy. The expectation of continued low taxes, perhaps even lower, with minimal effort to reduce the deficit, is good for stocks and the U.S. dollar, but bad for bonds, at least in the short run. This trend started a few weeks before the election, as reflected in October's returns. Investors in speculative stocks that crashed when the emerging growth stock bubble of 2020 burst also seem to like this new environment, as do crypto investors, given the new administration’s pro-crypto stance. It was a bad month to be heavily invested in foreign stocks and long-term bonds, explaining our weak returns compared to the S&P 500.
Long-term bonds are off just over 10% since mid-September, erasing the year’s gains. Inflation-adjusted bonds are faring better and remain positive for the year, as the election outcome suggests rising inflation. The U.S. dollar has strengthened, reflecting confidence that the U.S. will perform relatively well in a high-budget-deficit, low-tax, and low-regulation environment compared to more stagnant global economies. However, the prospect of an even larger tariff regime than the one introduced in 2018 (and largely maintained under the Biden administration) complicates the dollar’s recent movements.
Rates are a key factor for currencies. Our now-higher rates are attractive to foreign investors. U.S. 10-year government debt now yields around 4.5%, up from around 3.6% in September, while German 10-year government debt is at about 2.3%, up from 2.1%. If higher tariffs are enacted, with or without a trade war, we’ll likely buy less from abroad. In theory, this supports the value of the U.S. dollar since less of our money is converted to other currencies, but it doesn’t translate into strong economic policy. With a rising U.S. dollar, U.S. exports will face challenges—even without tariffs on exports. During the last round of tariff hikes, there were reciprocal tariffs.
The stock market is usually forward-looking, but it’s possible that only the next few quarters are being factored in now. Playing “investing musical chairs” ahead of a trade war might seem like a good idea. Plus, there are still trillions in cash and bonds, and cash yields are heading down (for now) as the Fed believes the battle against inflation is almost won. Longer-term bonds remain a poor choice if inflation resurges.
The belief that we’ve beaten inflation without causing a recession or major stock market decline has buoyed the market—up around 20% for the year through the end of October. If true, this success is likely due to near-record deficit spending relative to GDP during good times with low unemployment. Essentially, we’re running a massive stimulus plan to offset any economic drag caused by higher rates. With no end in sight to this large gap between tax revenues and spending, why leave the party?
Our only strong area last month (excluding some short funds that were up) was Vanguard Communication ETF (VOX). Despite being heavy in large-cap tech companies that were down slightly last month, the fund gained 2.38%. The real drag came from foreign stock funds, which dropped sharply due to the rising U.S. dollar and interest rates. At the bottom of the heap were Franklin FTSE Brazil (FLBR), down 7.28%; Franklin FTSE South Korea (FLKR), down 6.84%; and Vanguard FTSE Europe (VGK), down 5.51%. Globally, more value-oriented stocks also fell, as investors sought strong growth stories. Vanguard Value Index (VTV) was down 1.38% last month, slightly worse than the S&P 500.
Long-term bonds were hit hard as rates rose sharply and inflation expectations climbed. Vanguard Extended Duration Treasury (EDV) and Vangaurd L/T Treasury (VGLT) were down 7.17% and 5.24%, respectively, erasing the year’s gains in just a few weeks. Looking forward, it will be challenging for the expensive U.S. market to outperform nearly 5% yields from long-term, default-risk-free bonds. Investors are now more concerned that deficit-spending policies will boost stocks and inflation, making 5% yields less attractive in an environment with 3-4% inflation.
More concerning than the U.S. stock market's valuation relative to foreign stocks and bonds is the return of speculation in cryptocurrencies and “innovation” stocks. These assets, which collapsed around 80% as a group during the 2022 growth stock crash, have regained momentum. With no clear roadblocks to this speculation—especially as the Fed isn’t likely to step in like it did in 1929 to rein in speculation—the casino remains open.
It may feel like the 1980s are back, with the promise of years of strong market returns. However, we are starting from a much different point—stock valuations are already high, taxes are low, and total government debt-to-GDP is around four times the level of 1980. This leaves little room for significant valuation expansion, major tax cuts, or further increases in deficit spending.
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The election is over, and investors in the U.S. stock market seem to like the results. Investors in everything else—namely foreign stocks and bonds—aren’t as happy. The expectation of continued low taxes, perhaps even lower, with minimal effort to reduce the deficit, is good for stocks and the U.S. dollar, but bad for bonds, at least in the short run. This trend started a few weeks before the election, as reflected in October's returns. Investors in speculative stocks that crashed when the emerging growth stock bubble of 2020 burst also seem to like this new environment, as do crypto investors, given the new administration’s pro-crypto stance. It was a bad month to be heavily invested in foreign stocks and long-term bonds, explaining our weak returns compared to the S&P 500.
Our Conservative portfolio declined 4.00%, and our Aggressive portfolio fell 3.31%. Benchmark Vanguard funds for October 2024 were as follows: Vanguard 500 Index Fund (VFINX), down 0.91%; Vanguard Total Bond Index (VBMFX), down 2.44%; Vanguard Developed Mkts Index (VTMGX), down 5.30%; Vanguard Emerging Mkts Index (VEIEX), down 3.13%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, down 2.32%.
Long-term bonds are off just over 10% since mid-September, erasing the year’s gains. Inflation-adjusted bonds are faring better and remain positive for the year, as the election outcome suggests rising inflation. The U.S. dollar has strengthened, reflecting confidence that the U.S. will perform relatively well in a high-budget-deficit, low-tax, and low-regulation environment compared to more stagnant global economies. However, the prospect of an even larger tariff regime than the one introduced in 2018 (and largely maintained under the Biden administration) complicates the dollar’s recent movements.
Rates are a key factor for currencies. Our now-higher rates are attractive to foreign investors. U.S. 10-year government debt now yields around 4.5%, up from around 3.6% in September, while German 10-year government debt is at about 2.3%, up from 2.1%. If higher tariffs are enacted, with or without a trade war, we’ll likely buy less from abroad. In theory, this supports the value of the U.S. dollar since less of our money is converted to other currencies, but it doesn’t translate into strong economic policy. With a rising U.S. dollar, U.S. exports will face challenges—even without tariffs on exports. During the last round of tariff hikes, there were reciprocal tariffs.
The stock market is usually forward-looking, but it’s possible that only the next few quarters are being factored in now. Playing “investing musical chairs” ahead of a trade war might seem like a good idea. Plus, there are still trillions in cash and bonds, and cash yields are heading down (for now) as the Fed believes the battle against inflation is almost won. Longer-term bonds remain a poor choice if inflation resurges.
The belief that we’ve beaten inflation without causing a recession or major stock market decline has buoyed the market—up around 20% for the year through the end of October. If true, this success is likely due to near-record deficit spending relative to GDP during good times with low unemployment. Essentially, we’re running a massive stimulus plan to offset any economic drag caused by higher rates. With no end in sight to this large gap between tax revenues and spending, why leave the party?
Our only strong area last month (excluding some short funds that were up) was Vanguard Communication ETF (VOX). Despite being heavy in large-cap tech companies that were down slightly last month, the fund gained 2.38%. The real drag came from foreign stock funds, which dropped sharply due to the rising U.S. dollar and interest rates. At the bottom of the heap were Franklin FTSE Brazil (FLBR), down 7.28%; Franklin FTSE South Korea (FLKR), down 6.84%; and Vanguard FTSE Europe (VGK), down 5.51%. Globally, more value-oriented stocks also fell, as investors sought strong growth stories. Vanguard Value Index (VTV) was down 1.38% last month, slightly worse than the S&P 500.
Long-term bonds were hit hard as rates rose sharply and inflation expectations climbed. Vanguard Extended Duration Treasury (EDV) and Vangaurd L/T Treasury (VGLT) were down 7.17% and 5.24%, respectively, erasing the year’s gains in just a few weeks. Looking forward, it will be challenging for the expensive U.S. market to outperform nearly 5% yields from long-term, default-risk-free bonds. Investors are now more concerned that deficit-spending policies will boost stocks and inflation, making 5% yields less attractive in an environment with 3-4% inflation.
More concerning than the U.S. stock market's valuation relative to foreign stocks and bonds is the return of speculation in cryptocurrencies and “innovation” stocks. These assets, which collapsed around 80% as a group during the 2022 growth stock crash, have regained momentum. With no clear roadblocks to this speculation—especially as the Fed isn’t likely to step in like it did in 1929 to rein in speculation—the casino remains open.
It may feel like the 1980s are back, with the promise of years of strong market returns. However, we are starting from a much different point—stock valuations are already high, taxes are low, and total government debt-to-GDP is around four times the level of 1980. This leaves little room for significant valuation expansion, major tax cuts, or further increases in deficit spending.