The economy remains surprisingly buoyant, despite the Federal Reserve's relentless rate increases to temper persistent, high inflation. Given that we're still in a real estate bubble, built upon a foundation of low rates and lax Covid-related fiscal and monetary policy, this is quite a remarkable feat. Surprisingly, big tech and growth names, which suffered significantly in 2022, have bounced back. This resurgence is notable because these entities were hit hard, in part due to rising rates that diminished the value of future earnings growth. Interest rates continue to be high, and long-term rates—though significantly lower than their 2022 peak—are climbing again. This trend is leading to a decline in most bond funds and causing mortgage rates to rise. Despite investors capitalizing on the risk-free 5% yield, it seemingly hasn't had a negative impact on the market.
With bonds and value stocks down, we had a challenging month relative to the large cap growth-heavy S&P 500, which was up by less than 1%. Factor in a strong US dollar dragging on the values of foreign stocks and bonds, and we experienced almost all drag in May. We were not alone. The S&P 500 landed in the top 7% or so of all fund categories even with just a 0.43% showing, as over 90% of fund categories were down last month. The S&P 500 was also in the top 5% of all fund categories for the year with a 9.65% return. This masks the wild outperformance of growth relative to value stocks. Tech funds were up around 8% last month and 22% for the year, with large-cap growth close behind, up over 16% for the year and approximately 3.5% last month.
Meanwhile, value stocks, which performed well in 2022 as the growth market crashed, are severely lagging in 2023. This is evident in our Vanguard Value Index (VTV) holding, down 4.12% last month and now down 3.41% for the year. On the flipside, our recently re-added Vanguard Communication ETF (VOX), which has large cap tech stock exposure, was up 2.61% last month and a staggering 23.79% this year. This performance spread between value and growth stocks is hurting LeatherBack L/S Alt. Yld. (LBAY), now down 13.2% for the year after a drop of 7.33% last month. Many market-neutral and long-short funds essentially short expensive stocks and buy value, a recipe for disaster when the tech bubble re-inflates.
Our communications fund was on our short list of winners this year, with our oil short up 21%, Franklin FTSE Germany (FLGR) up 13.57% for the year even after dropping 4.76% last month, and a 13.45% gain for the year in our retail stock short as we're seeing retailers collapse as the Covid stimulus money runs out, notably Bed Bath & Beyond. This will only add to the trauma brewing in commercial real estate as work-from-home continues at levels that can hurt offices financed by once-low rates.
One might assume that rising rates would induce a recession, quash the speculative frenzy in growth stocks, and pop our second real estate bubble. Somewhere after the dust settles and we return to 0% rates, a new speculative boom would likely rise from the ashes.
Investors appear to have collectively decided to anticipate the next crash because we don't know when it will happen or where the bottom will be, but we are confident that in 5 years we'll reach new highs on a fresh boom. The new speculative boom seems to be AI, and to a lesser extent, virtual reality. The first wave of AI – such as Siri and other smart devices – was a disappointment, as was the early excitement around virtual reality, the metaverse, Google Glass, etc.
We've seen many speculations about the future that haven't lived up to stock prices along the way, and we'll have to see if this latest boom will be one of the significant ones, like PCs, the Internet, or the Smartphone, or an expensive dud like nanotechnology, crypto, or self-driving cars (so far).
This boom had better live up to the hype – investors are forgoing a risk-free 5% yield to own a piece of the AI future. Ironically, if the hype is real, this tech advancement, if it doesn’t wipe us out, may just destroy enough of the economy as jobs get replaced by software, potentially negating any benefits from productivity, at least in the short run.
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The economy remains surprisingly buoyant, despite the Federal Reserve's relentless rate increases to temper persistent, high inflation. Given that we're still in a real estate bubble, built upon a foundation of low rates and lax Covid-related fiscal and monetary policy, this is quite a remarkable feat. Surprisingly, big tech and growth names, which suffered significantly in 2022, have bounced back. This resurgence is notable because these entities were hit hard, in part due to rising rates that diminished the value of future earnings growth. Interest rates continue to be high, and long-term rates—though significantly lower than their 2022 peak—are climbing again. This trend is leading to a decline in most bond funds and causing mortgage rates to rise. Despite investors capitalizing on the risk-free 5% yield, it seemingly hasn't had a negative impact on the market.
Our Conservative portfolio declined by 2.87%, and our Aggressive portfolio dropped by 1.63%. Benchmark Vanguard funds for May 2023 were as follows: Vanguard 500 Index Fund (VFINX), up 0.43%; Vanguard Total Bond Index (VBMFX), down 1.09%; Vanguard Developed Mkts Index (VTMGX), down 3.70%; Vanguard Emerging Mkts Index (VEIEX), down 2.48%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, down 0.73%.
With bonds and value stocks down, we had a challenging month relative to the large cap growth-heavy S&P 500, which was up by less than 1%. Factor in a strong US dollar dragging on the values of foreign stocks and bonds, and we experienced almost all drag in May. We were not alone. The S&P 500 landed in the top 7% or so of all fund categories even with just a 0.43% showing, as over 90% of fund categories were down last month. The S&P 500 was also in the top 5% of all fund categories for the year with a 9.65% return. This masks the wild outperformance of growth relative to value stocks. Tech funds were up around 8% last month and 22% for the year, with large-cap growth close behind, up over 16% for the year and approximately 3.5% last month.
Meanwhile, value stocks, which performed well in 2022 as the growth market crashed, are severely lagging in 2023. This is evident in our Vanguard Value Index (VTV) holding, down 4.12% last month and now down 3.41% for the year. On the flipside, our recently re-added Vanguard Communication ETF (VOX), which has large cap tech stock exposure, was up 2.61% last month and a staggering 23.79% this year. This performance spread between value and growth stocks is hurting LeatherBack L/S Alt. Yld. (LBAY), now down 13.2% for the year after a drop of 7.33% last month. Many market-neutral and long-short funds essentially short expensive stocks and buy value, a recipe for disaster when the tech bubble re-inflates.
Our communications fund was on our short list of winners this year, with our oil short up 21%, Franklin FTSE Germany (FLGR) up 13.57% for the year even after dropping 4.76% last month, and a 13.45% gain for the year in our retail stock short as we're seeing retailers collapse as the Covid stimulus money runs out, notably Bed Bath & Beyond. This will only add to the trauma brewing in commercial real estate as work-from-home continues at levels that can hurt offices financed by once-low rates.
One might assume that rising rates would induce a recession, quash the speculative frenzy in growth stocks, and pop our second real estate bubble. Somewhere after the dust settles and we return to 0% rates, a new speculative boom would likely rise from the ashes.
Investors appear to have collectively decided to anticipate the next crash because we don't know when it will happen or where the bottom will be, but we are confident that in 5 years we'll reach new highs on a fresh boom. The new speculative boom seems to be AI, and to a lesser extent, virtual reality. The first wave of AI – such as Siri and other smart devices – was a disappointment, as was the early excitement around virtual reality, the metaverse, Google Glass, etc.
We've seen many speculations about the future that haven't lived up to stock prices along the way, and we'll have to see if this latest boom will be one of the significant ones, like PCs, the Internet, or the Smartphone, or an expensive dud like nanotechnology, crypto, or self-driving cars (so far).
This boom had better live up to the hype – investors are forgoing a risk-free 5% yield to own a piece of the AI future. Ironically, if the hype is real, this tech advancement, if it doesn’t wipe us out, may just destroy enough of the economy as jobs get replaced by software, potentially negating any benefits from productivity, at least in the short run.