The smooth ride up for US stocks seems to have ended as investors grapple with the good news of slowing inflation and likely rate decreases by the Fed, alongside the potentially bad news that the reason for inflation coming down is that the entire economy might follow it downward. Dropping rates slowly may not be enough to prevent this.

A very strong year for US stocks appeared to have ended in mid-July with a sharp drop into early August, only to be followed by an equally fast rise back to yearly highs by late August—only for much of that to evaporate in early September. Bonds have been steady gainers for the last few months as, at least, the rate environment seems predictable, even if the economy and corporate earnings growth are not. With foreign markets and bonds improving, we once again posted good returns relative to the US market and a globally balanced portfolio.

Our Conservative portfolio gained 2.34%, and our Aggressive portfolio gained 3.18%. Benchmark Vanguard funds for August 2024 were as follows: Vanguard 500 Index Fund (VFINX) up 2.42%; Vanguard Total Bond Index (VBMFX) up 1.33%; Vanguard Developed Mkts Index (VTMGX) up 2.87%; Vanguard Emerging Mkts Index (VEIEX) up 1.07%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 1.99%.

There seems to be growing confidence that rates will plunge with slowing inflation and that a safe 5% return will soon be a thing of the past. It might be. What is less clear is the future for longer-term rates. If too much money chases too few non-stock investments, we may see 2–3% long-term rates again. However, many investors lost a lot in recent years when longer-term rates climbed fast (including us), so the demand for 2% long-term bonds may not be strong anytime soon — even with falling inflation. Perhaps we’ll see a more normal steep yield curve, where short-term rates are 2% and long-term rates are 4% or higher, which could lead to losses for those buying longer-term bonds now, even though rates are still well above the lows of a few years ago.

The completely nonsensical ramblings about future fiscal policy from both candidates probably aren’t helping, unless you believe tariffs, new tax cuts, or taxing unrealized capital gains are somehow magical solutions to reducing frightening budget deficits—ideas that were tried with poor results in the 1920s here and, in the case of wealth taxes, more recently in France. The only wealth taxes that work (defined as bringing in substantial revenue) are on things that can’t be moved to another country, like homes and sometimes cars. The only tariffs that bring in significant revenue are those that aren’t reciprocated. Perhaps this is irrelevant—politicians always dodge the harsher realities of budgets. More recently, though, they seem to not care about the longer-term effects of populist policies.

In our own portfolios, we saw 2%+ returns in our bond funds (excluding the short-term cash-like fund BondBloxx Six Month Treasury ETF (XHLF)) as rates declined. iShares JP Morgan Em. Bond (LEMB) was further boosted by a falling dollar, as our future rate advantage over other countries seems less enticing to global investors.

Our Brazil fund Franklin FTSE Brazil (FLBR) rebounded sharply in August with a 7.05% return, somewhat odd given oil and commodity prices dipped, which generally is not great for a country with such a high percentage of economic activity from natural resources. Much of this was just a rebound from a sharp drop in stock prices in previous months. Latin American stocks in general had a good month, up over 4%, though, like Brazil, they are still down for the year—essentially the only weak area globally in stocks in 2024 other than China still down slightly for the year. Some of this may be attributed to Brazil’s well-above-average dividend yields in a now-falling rate environment. Other yield-heavy stocks also did well last month, including real estate stocks globally and utilities, the latter almost matching the S&P 500 this year with an 18.8% return.

The only weak areas in our portfolio, besides shorting junk bonds and Nasdaq stocks, were Franklin FTSE South Korea (FLKR), down 1.08%, and Franklin FTSE China (FLCH), which was barely up at 0.35%. Crypto was weak, so we saw gains in our inverse Crypto ETF, and our ETF that shorts lower-quality names LeatherBack L/S Alt. Yld. (LBAY) even scored a 3.11% return, while poor returns in retailers helped push ProShares Decline of Retail (EMTY) up 2.14%. We may have reached maximum rebound from the 2022 crash lows in Covid bubble stocks and crypto, which tanked in 2021–2022 only to rebound sharply through early 2024.

We may be seeing two different reactions to higher interest rates play out globally. Inflation is down, but US central bankers are still on high alert. Interest rates remain high, and bonds are down slightly for the year, though they have recently improved. US large-cap growth stocks are still white hot, while the rest of the stock market is only fair. Abroad, larger foreign markets are up less than 5% for the year after a weak June, compared to a roughly 15% return for the S&P 500 in 2024.

Our Conservative portfolio gained 0.12% in June, and our Aggressive portfolio declined 0.57%. Benchmark Vanguard funds for June 2024 were as follows: Vanguard 500 Index Fund (VFINX) up 3.58%; Vanguard Total Bond Index (VBMFX) up 0.93%; Vanguard Developed Mkts Index (VTMGX) down 1.91%; Vanguard Emerging Mkts Index (VEIEX) up 2.17%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 1.02%.

By moving into out-of-favor areas, our portfolios are positioned for a rotation from US large-cap growth stocks to bonds and smaller, more value-oriented global stocks—a market shift that hasn't happened yet, resulting in our performance lagging behind the S&P 500. Foreign stocks, including emerging markets, are still below 2021 highs, and bonds are down from 2020 highs.

There are signs parts of the real estate market are cracking under higher rates, notably commercial real estate, where sloppy high-risk lending is becoming apparent. While it is partially true that the worst aspects of the 2005 era real estate bubble—liar loans, no income no job (NINJA) loans, low down payments, excessive subprime loans—have been greatly reduced, the prime loans backing today's real estate boom may prove otherwise.

A recent article in the WSJ notes how commercial borrowers essentially lied about building revenues and expenses to get favorable loans, and lenders didn't look too closely. Many projects simply aren't going to work out at current high rates, as the income from the project can't handle higher payments. This has been a slow-moving crisis with extend and pretend arrangements, where defaults can be pushed off by not forcing borrowers' hands.

Perhaps this will devolve into the zombie loan era in Japan post-1989 twin stock and real estate bubbles, one that took decades to fully clear out of the system. The strong Japanese market (thanks to what else — chip stocks) broke the all-time intraday Nikkei 225 high set back in 1989. Can it happen here? Not likely, but it might if we lose the ability to respond to disasters either by bond investors being unwilling to buy more debt without demanding higher rates or the Fed losing the ability to create money to buy debt without causing high inflation.

Recent developments seem to reinforce US large-stock global dominance. Interest rates don't seem to be dragging on our economy much, which is astounding considering the high prices in real estate matched with now high mortgage rates. Abroad, perhaps due to weaker economic foundations, fewer long-term rate-locked mortgages, minimal AI boom, or just less deficit spending compared to the USA, currencies are weakening and the economy is sluggish. We are increasingly standing alone, except for maybe India, which has been a lone standout in strong stock market performance over much of the last decade.

Funds investing in India were up almost 7% last month, the top showing for all fund categories, and are now up over 13% for the year, the only single country fund category up double-digits this year except for the US. The gap with China and Latin American funds is astounding over the last 5 years—double-digit annual returns vs. negative returns. Part of this is political risk, but much of it is what happens to hot markets. About 15 years ago, China and Latin America were the hot areas to invest with scorching hot returns over the early 2000s until they crashed hard. This should be a warning to investors in large-cap tech stocks now, as well as in India. There is no way to know when the reversal of stock market fortunes will happen, but it is usually close to when money starts flowing out of poorly performing areas into hot markets and a bigger performance gap appears between the hot and not areas.

Utilities took a dive last month, offering a possible re-entry point. The bubble in energy-intensive AI, on top of energy-intensive crypto mining, ongoing shifts to electricity-guzzling EVs, and higher temperatures seem to offer good fundamentals for energy consumption for the foreseeable future.

In our own portfolios, the only strong areas were shorting bitcoin and retailers and our stake in Franklin FTSE South Korea (FLKR), which was having a bad year until last month. Our other single country funds performed poorly, down between 3 and 5% for the month, much of this due to currency weakness. This is why Invesco CurrencyShares Euro (FXE) was down 1.13% and iShares JP Morgan Em. Bond (LEMB) was down 1.16%, even though lower rates pushed Vanguard Extended Duration Treasury (EDV) up 2.5%, clawing back losses for the year.

Somewhat wild swings in interest rates recently and steady tech stock booming could mean a rough late 2024.

In April 2024 the financial markets experienced heightened volatility due to an increase in interest rates, which impacted bond prices. Our Conservative portfolio declined by 3.86%, while our Aggressive portfolio fell 3.06%.

Benchmark Vanguard funds for April 2024: Vanguard 500 Index Fund (VFINX) was down 4.09%, Vanguard Total Bond Index (VBMFX) declined 2.44%, Vanguard Developed Mkts Index (VTMGX) decreased by 3.35%, and Vanguard Emerging Mkts Index (VEIEX) posted a modest gain of 1.02%. Vanguard Star Fund (VGSTX), a global balanced portfolio, was down 3.38%.

Our longer-term bonds were the primary driver of our Conservative portfolio underperforming Vanguard's roughly 60% stocks/40% bonds portfolio. The main upside last quarter was shorting and funds with stocks in China, explaining how our Aggressive portfolio had less downside than our Conservative portfolio in a down month.

Proshares Short Bitcoin (BITI) surged 18.79%, benefiting from Bitcoin's significant price drop as the post-ETF launching craze flattens out. ProShares Decline of Retail (EMTY) rose 13.06% as consumer spending weakened amidst sticky inflation. Franklin FTSE China (FLCH) gained 4.63% due to China's improved economic performance and strong industrial output, plus months of poor performance turning around in February of this year.

Franklin FTSE South Korea (FLKR) dropped 6.33%, impacted by regional geopolitical tensions involving North Korea and China. FLJP fell 5.61% amid Japan's sluggish economic recovery. Franklin FTSE Brazil (FLBR) decreased by 4.20%, adding to a poor 2024. Vanguard Communication ETF (VOX) was down 3.98%, mainly due to poor performance in tech-heavy stocks pressured by rising interest rates. Communications funds are no longer just Verizon-type companies but contain around 50% mega-cap tech stocks like Meta (Facebook) and Alphabet (Google).

BondBloxx Six Month Treasury ETF (XHLF) slightly increased by 0.34%, as short-term bonds don't go up or down much with rising rates. On the other end of the yield curve, Vanguard Extended Duration Treasury (EDV) fell 9.12%, heavily hit by rising long-term interest rates affecting long-duration bonds.

In April 2024, some of the hottest areas in an otherwise down market were funds focusing on precious metals. These surged nearly 5% as gold and silver continued to do well on inflation worries and foreign central bank buying, and doom and gloomier fears over the collapse of money because of rising government deficits. Gold is "boomer bitcoin."
Strangely, Bitcoin had a terrible month even though both it at gold trade are attractive to anxious investors.

Chinese stock funds rose over 4%. Commodities funds, including oil and metals, gained around 3%, benefiting from resilient prices and a not slowing much U.S. economy. Indian equity funds increased over 2%, continuing a strong run as essentially the best performing foreign market over the last decade and the only country with near U.S. stock market returns over this longer period. On the downside last month, digital asset funds plummeted 20%. Real estate funds fell almost 7% because of rising interest rates. Small-cap growth, health, and mid-cap growth funds also faced declines in the high-interest-rate environment, dropping around 6% to 7%.

The economy and markets are still trying to thread the needle of reducing inflation without causing a recession. So far, so good. But it always is until it isn't.

The market booked another strong month for U.S. stocks. The only foreign market that outperformed the U.S. in February was China which rebounded nearly 10%. Interest rates drifted back up, sending bonds down. Our globally balanced portfolio was up but lagged behind U.S. stocks by a wide margin, as a handful of growth stocks continued to drive returns. Year to date the S&P 500 is up just over 7%, foreign markets as a whole are only up around 1%, and the U.S. bond market is down 1.6%.

Our Conservative portfolio gained 1.05%, and our Aggressive portfolio gained 1.65% in February. Benchmark Vanguard funds for February 2024 were as follows: Vanguard 500 Index Fund (VFINX), up 5.34%; Vanguard Total Bond Index (VBMFX), down 1.39%; Vanguard Developed Mkts Index (VTMGX), up 2.83%; Vanguard Emerging Mkts Index (VEIEX), up 3.98%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 2.43%.

Our strong areas relative to the hot U.S. market last month were Franklin FTSE South Korea (FLKR) and Franklin FTSE China (FLCH), up 8.13% and 6.62% respectively, with a good showing in Homestead Value Fund (HOVLX) and Franklin FTSE Germany (FLGR). Most of our foreign stock funds were a relative drag, and it's better not to even ask about shorting Bitcoin as the crypto bubble flares up again.

Rates drifted back up, sending our three longer-term bond funds down over 2%. Inflation is going in the right direction, but with a mini trade war with China, sky-high real estate prices, and questionable work-at-home productivity, alongside ongoing massive deficit spending, it is unclear if we'll see stable low inflation without higher rates. Worse, it appears low rates could lead to an even bigger asset bubble than we had a couple of years ago before rates went up.

The year began with several major bank collapses, necessitating FDIC intervention to ensure depositors for amounts well beyond the official $250,000 maximum. This action was crucial to prevent further bank runs. Subsequently, long-term interest rates soared, surpassing the highs of 2022 — a year of record setting losses for bonds. This spike in rates jeopardized the economy, real estate, and stock markets. However, towards year-end, falling inflation, a surprisingly robust economy, and expectations of reduced short-term rates led to a dramatic decrease in long-term rates and a significant stock market rally, especially in speculative sectors that suffered in 2022.

Overall, the bond market closed the year with slight gains, reversing what appeared to be another year of double-digit losses for long-term bonds. U.S. stocks experienced one of their best years, with the S&P 500 returning over 26%. Conservative strategies focusing on bonds and lower-risk stock funds underperformed, achieving less than half of the stock market's substantial gains. In December, our Conservative portfolio outperformed the robust S&P 500, while our Aggressive portfolio essentially matched it, benefitting from the bond rebound. However, the underweighting in U.S. stocks resulted in relatively modest annual returns of approximately 8% and 9.5% for our Conservative and Aggressive portfolios, respectively.

In December our Conservative portfolio gained 5.28%, and our Aggressive portfolio gained 4.43%. Benchmark Vanguard funds for December 2023 were as follows: Vanguard 500 Index Fund (VFINX), up 4.54%; Vanguard Total Bond Index (VBMFX), up 3.69%; Vanguard Developed Mkts Index (VTMGX), up 5.70%; Vanguard Emerging Mkts Index (VEIEX), up 3.29%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 5.07%.

We expected near 8% mortgage rates and rapidly rising corporate and consumer borrowing costs would strain the economy and stock market. This prediction, too commonplace, did not materialize, as is often the case with too-popular predictions. The Federal Reserve may have mitigated Covid stimulus inflation without causing a larger crisis, deserving some credit for this outcome.

For 2023, our primary underperformers were investments in China, bonds, and short positions. We regret not purchasing more long-term bonds during the drop in bond prices and spike in yields, although yields did not reach our anticipated 5%+ on 10-year bonds. Many investors sought to lock in near 5% rates before expected Federal Reserve rate cuts, bringing into question if rates really have peaked. Currently, shorter-term and inflation-adjusted bonds, along with foreign bonds, present more attractive opportunities, particularly if U.S. rates continue to decline and the dollar weakens.

Our China ETF Franklin FTSE China (FLCH) was the weakest stock fund in our portfolio, down approximately 2% in December and 11.1% for the year. It was our only fund to post a yearly loss without involving short positions. Chinese stocks, being a significant component of emerging market funds, largely influenced the modest single digit returns of these indexes in 2023, despite stronger performances in other markets. China's economic challenges, including a faltering real estate market and trade tensions with the U.S., remain concerns. U.S. policies under Biden, maintaining Trump-era tariffs and focusing on domestic spending in infrastructure and environmental initiatives, complicate the trade dynamics. These protectionist measures may counteract efforts to control inflation, as China has been a key factor in keeping inflation low in the U.S. since the early 2000s.

Political risks in China, including the government's increasing control over tech companies, are also significant. These developments may make Chinese tech stocks, already discounted due to government intervention, more appealing than high-valuation U.S. tech giants, which might face similar regulatory scrutiny.

Other areas of modest performance in 2023 included value stocks and traditionally safer sectors like pharmaceuticals. Our long-term holding in Homestead Value Fund (HOVLX) yielded a 12.86% return, while VanEck Vectors Pharma. (PPH) returned a modest 6.53%. With the market's shift back to growth stocks, we are considering increasing our value stock holdings and possibly divesting from the high performing Vanguard Communication ETF (VOX). Utilities, the only other negative stock fund category besides China funds, may also see a resurgence in our portfolio. While commodities were down, natural resource funds that own stocks in these sectors were up by around 7%.

Our short positions universally declined. Notably, the small ETF LeatherBack L/S Alt. Yld. (LBAY), which had a strategy of owning value-oriented stocks while shorting overpriced growth stocks, fell 8.53% for the year, after a solid 2021 and 2022 with roughly 22% returns in each of those years when trendy growth stocks sunk hard. This result was due to the modest performance of value stocks compared to the substantial gains of speculative growth stocks in 2023.

Reflecting on 2023, it's crucial to remember the year's significant bank failures, a disaster averted by government intervention. This action protected the banking system by insuring deposits well above the FDIC limit. The relatively inexpensive bailout, funded by future bank earnings and higher insurance fees, was a necessary measure to prevent a grimmer scenario. It is unclear why it was necessary to bail out billion-dollar uninsured deposits that would have experienced some losses to stop a bank run spreading when these investors could have taken some losses and FDIC could have increased support for other banks that didn't collapse to prevent more bank runs and minimize the hit to the FDIC insurance fund. This government support also raises questions about risk-taking in the financial sector. The recent inflation and interest rate hikes may signal limits to future government intervention. We hope the emerging real estate and crypto bubbles can dissipate without requiring significant government action or the rebound train might not come in on time again.