The seesaw continued with most of what was weak in April rebounding in May. The economy and inflation seem to be cooling at a safe pace. Rising speculation in crypto and meme stocks didn’t seem to alarm investors even though it could mean the Fed is going to keep burning money a bit longer. Foreign markets are starting to participate more when US stocks go up, though in general, the economic situation in Europe isn’t impressive.

The S&P 500 is up about twice as much as foreign stocks this year with an over 11% return after May's rebound. Most of the world does not do 30-year fixed-rate mortgages, so it is likely rising rates will start dragging on other economies sooner than the US.

Our Conservative portfolio gained 2.83%, and our Aggressive portfolio gained 2.75%. Benchmark Vanguard funds for May 2024 were as follows: Vanguard 500 Index Fund (VFINX), up 4.95%; Vanguard Total Bond Index (VBMFX), up 1.70%; Vanguard Developed Mkts Index (VTMGX), up 4.76%; Vanguard Emerging Mkts Index (VEIEX), up 1.94%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 3.43%.

Our best holding was Vanguard FTSE Europe (VGK) up 6.45%, followed by tech-heavy Vanguard Communication ETF (VOX) up 6.4%. Europe somehow beat the S&P 500 for the first time in quite a while during a strong month for stocks, helped by a tailwind of a rising Euro.

Falling oil boosted our oil short, but all other shorts were weak, notably our inverse Bitcoin stake as "stupid gold" cranked back up and gamblers dove back into meme stocks and other near-guaranteed long-term losers. Our long-short LeatherBack L/S Alt. Yld. (LBAY) performed well with a 2.68% return considering many junk stocks were on the move up and value stocks in general lagged growth. The fund may still have a larg(ish) short position in DoorDash [DASH] which slid pretty hard in May.

You have to wonder if Roaring Kitty—the GameStop manipulator and YOLO hero of the anti-hedge fund little guy who appears to have amassed some quarter billion dollars plus worth of his favorite dead-end stock—will single-handedly tip the scales in favor of 'higher for longer' rates as the Fed sees speculative bubbles that need addressing and could cause a global real estate collapse 2.0. The odds aren't zero. Maybe this time around he'll get his fans to actually buy more at GameStop locations (instead of downloading games) because merely buying the stock is only delaying the inevitable.

Brazil is having a rough year partially due to weakish commodity prices and more recently tragic flooding that will weigh on the economy. Franklin FTSE Brazil (FLBR) fell 4.01% last month, while China continued to rebound with a 4.48% jump for Franklin FTSE China (FLCH).

Bonds were strong but not strong enough to turn positive for the year. Vanguard Extended Duration Treasury (EDV) rebounded almost 4% last month compared to the total bond index return of 1.7%.

Inflation seems to be moderating, but there are many shifts going on that could maintain well above 2% inflation for longer than expected. Rising real estate prices both boost costs with rents as well as lead to wealth-effect spending by those with twin gains from stocks and their homes. Retired boomers are so far not spending down the equity as inflation fears and probably hits to bonds have scared many into more modest spending habits than the historical high levels of wealth would indicate.

Increasing tariffs on lower-priced goods from China while simultaneously subsidizing purchases, all while running recession-grade deficits, is ridiculous on multiple fronts. In addition, we're effectively cutting the federal gas tax every year as it doesn’t go up with inflation and is currently sitting at early 1990s levels of $0.18, which used to be almost 20% of the pump price when gas was around a dollar but is now around 5%. It would have been so much easier economically (though not politically) to reduce inflation and lead to EV car adoption by just scrapping the huge credits to buy pricey EVs and cranking up fuel taxes. This would also have reduced our yearly deficit. Moreover, the hit to global energy prices from such tax increases would have done more to slow Russia's financing of military adventures than half-baked sanctions and would be less risky than trying to figure out which of our weapons can be used by Ukraine against Russia without triggering Putin.

As we're not going to tighten any belts in America, no matter how high inflation or how important getting our finances in order for the next calamity is, it is possible we'll be back into energy funds again soon.

March deviated from the norm with the S&P 500 index not beating 90% of fund returns — it was more in the middle of all stock fund categories with a still respectable 3.22% gain. It seems the longstanding outperformance of the top growth stocks may be waning. Bonds had a moderate showing, though recently, rising inflation fears have caused rates to spike, driving most bond funds down for the year.

Our Conservative portfolio gained 2.18%, and our Aggressive portfolio saw a 1.91% increase in March. Benchmark Vanguard funds for March 2024 were as follows: Vanguard 500 Index Fund (VFINX), up 3.21%; Vanguard Total Bond Index (VBMFX), up 0.82%; Vanguard Developed Mkts Index (VTMGX), up 3.53%; Vanguard Emerging Mkts Index (VEIEX), up 1.57%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 2.41%.

The broader global market performance has bolstered our results, but troubling signs are emerging, primarily in the bond market. It’s been a volatile year for bonds, dipping to near 2022 lows in early April. Long-term government bond funds are now down about 10% for the year, following a 3% return in 2023 and a harsh 30%+ decline in 2022. Since the peak in 2022, longer-term bonds and bond funds have dropped nearly 50% from their high. Surprisingly, investment in bonds continues as investors rush to secure higher rates before a potential Federal Reserve rate drop.

Inflation has persisted longer than investors and the Federal Reserve had hoped. Commodities are surging, and interest rate hikes haven't quelled the housing market. Notably, investors are gravitating back towards speculative assets, from cryptocurrencies to high-risk growth stocks without earnings — sectors that plummeted after the Covid-related bubbles.

Recently, larger tech stocks have faltered, with Tesla [TSLA] down approximately 30% for the year after recovering from the last significant drop. Even the formidable Apple [AAPL] has seen declines this year. These stocks are influential in most indices. Some downward pressure comes from the ongoing debate over China, but there's also the potential for stricter global antitrust regulations that could hamper the aggressive business practices of market leaders.

Renewed inflation concerns drove precious metals funds up nearly 20% last month, outperforming even hot crypto-related funds. It's notable that the 15-year return on precious metals funds averages nearly zero, with the 10-year returns barely outpacing inflation.

Energy also surged as rising oil prices signal a robust economy that seems indifferent to rate changes or even a sluggish global economy.

In our own portfolios, we've seen some unexpected winners. Vanguard Value Index (VTV) was up 5.17% as investors seem to be embracing value once more. Our previously underperforming LeatherBack L/S Alt. Yld. (LBAY) leapt 4.73% as shorting popular stocks like Tesla began to yield results. This fund last performed well when lesser-quality stocks declined, but it's been lackluster during the resurgence of speculation. Vanguard Market Neutral (VMNFX), a fund we use in some client accounts, has adopted a more rewarding strategy of long positions in solid stocks versus shorting speculative ones, although this fund struggled during the speculative frenzy of the Covid era.

Most of our funds that focused on international markets outperformed the US market, except Franklin FTSE Brazil (FLBR), which was down 1.29%. Considering the relative weakness of the global economy compared to the US, this is a favorable outcome for us. The strengthening US dollar, bolstered by high rates compared to likely rate cuts abroad, has weighed on iShares JP Morgan Em. Bond (LEMB), down 0.26% last month.

Rising rates aren’t just bad for bonds. If long-term rates go back up over 5% and mortgages hit over 8%, we probably won’t see stocks hold up. The recent stock rally was built on hopes that inflation and rates would drop while the economy stayed solid.

December's significant returns for stocks and bonds largely fizzled out in January, at least for non-US stocks. There were some bright spots, like Japan, but most foreign markets and bonds were down. An allocation to still-sinking China more than offset our gains in Japan, and longer-term bond funds were down more than the bond index, resulting in negative numbers.

Our Conservative portfolio declined by 1.76%, and our Aggressive portfolio by 0.90%. Benchmark Vanguard funds for January 2024 were as follows: Vanguard 500 Index Fund (VFINX), up 1.68%; Vanguard Total Bond Index (VBMFX), down 0.24%; Vanguard Developed Mkts Index (VTMGX), down 1.23%; Vanguard Emerging Mkts Index (VEIEX), down 3.53%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, down 0.26%.

Only around 5% of all fund categories outperformed the S&P 500 last month (and not by much), as large-cap growth stocks in the US continued to deliver all the significant gains worldwide. Only our Vanguard Communication ETF (VOX) holding benefited from booming tech stocks, with a 3.9% return for the month. Our best holding was VanEck Vectors Pharma. (PPH), up 5.23% — a large gain for a relatively low-risk sector. Investors are excited about high-profit medications dealing with obesity and the near-limitless growth such advancements seem to predict. In some ways, obesity medications are the AI chips of healthcare.

Japan has been on a strong performance streak after decades of essentially going nowhere, helping our Franklin FTSE Japan ETF (FLJP) holding climb 2.93%, not enough to make up for significant losses in Franklin FTSE China (FLCH) down almost 10%. Japan has been so hot that their stock index is about to break the highs hit in 1989. That’s right, when you invest at the top of a bubble, it may take 35 years to break the old highs. Unlike with our own example in 1929, where high dividends led to an acceptable return even though the index took more than 20 years to break the old highs. In Japan, dividends were scarce as P/Es were to the moon in 1989, so total returns have been poor. With falling consumer prices for decades, the inflation-adjusted returns in Japan were less disastrous.

Interest rates drifted back up as ongoing fears over inflation and the Fed's near-future response weighed on bonds. Our long-term bond funds were down more than the bond index, with Vanguard Long-Term Bond Index ETF (BLV) down 1.37%, Vangaurd L/T Treasury (VGLT) down 1.79%, and Vanguard Extended Duration Treasury (EDV) taking a big near 4% hit, but these numbers were all after sharply strong year-end figures as rates fell with falling inflation in late 2023. iShares JP Morgan Em. Bond (LEMB) dipped 1.85%, but this was more due to currency fluctuations, perhaps related to general fears of emerging markets, of which China is the largest component both in the indexes and in actual economic activity.

With all the positivity in US markets, investors may have missed signs that large regional banks are still having problems, with drops in stocks that make the recovery since the FDIC bailouts and seizures of early 2023 seem premature. Banks are making nice interest rate spreads now, borrowing at near zero from branch depositors and lending at over 5%, but previous low-rate loans, especially to troubled commercial real estate developers, may overwhelm the otherwise benefits of a strong economy.

November was a month for the record books. The bond market abruptly reversed course as investors collectively decided that 5% on a ten-year government bond was about as high as we're going to see. With inflation continuing to decline to normal levels and all the money in cash looking to lock in higher rates for longer, investors engaged in an "everything everywhere all at once" rally in global investments. We never even hit 5% in October before rates plunged, sending bonds and everything else up in November.

Our Conservative portfolio gained 7.60%, and our Aggressive portfolio gained 6.93%. Benchmark Vanguard funds for November 2023 were as follows: Vanguard 500 Index Fund (VFINX), up 9.13%; Vanguard Total Bond Index (VBMFX), up 4.50%; Vanguard Developed Mkts Index (VTMGX), up 9.01%; Vanguard Emerging Mkts Index (VEIEX), up 6.76%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 8.27%.

While the Federal Reserve appears to have stopped raising short-term interest rates, longer-term rates were heading higher, leading to another bad year for the bond market. With inflation heading back to the Fed's target rate of 2%, it seems that rates, both short and long-term, won't go higher and may go lower, making all sorts of expensive assets seem less expensive. The hardest-hit rate-sensitive areas rebounded sharply.

While the bond index was up 4.5% last month, funds that owned longer-term bonds had one of the biggest moves up in history. Our rate-sensitive ETFs, Vanguard Extended Duration Treasury (EDV), Vanguard Long-Term Bond Index ETF (BLV), and Vangaurd L/T Treasury (VGLT), were up 14.03%, 9.97%, and 9.1% respectively, beating almost all of our stock funds. On the stock side (not including short funds), only China lagged with Franklin FTSE China (FLCH) up just 2.08%. Franklin FTSE Germany (FLGR) was up 12.78%, Franklin FTSE Brazil (FLBR) 14.44%, and Franklin FTSE South Korea (FLKR) 15%. Much of the big moves was in funds that have above-average dividend yields as investors rapidly decided it was time to lock in higher yields in case rates went back down. There seemed to be little concern that if rates go back down, we might be in a recession and stocks and higher-risk debt could slide. Utilities had a good month but are still down for the year, as are long-term bond funds.

We didn't just see big gains in higher-yield options – Cryptocurrencies and questionable growth stocks that crashed in 2022 continued on their big rebound year. All this euphoria may make the Feds stick with higher rates for longer. The Fed won't say it directly, but it is likely that rising house prices and crypto speculation are reasons not to lower rates.

Home prices are around 20% higher than the very peak in the 2007 era bubble, even adjusting for high inflation. One reason for inflation subduing may be that home ownership is consuming ever more of the household budget. Either way, the Fed doesn't want to create an even larger speculative bubble that could crash because rates followed inflation down. In this way, the return to risk-taking could risk the economy as it is easier to damage the real economy with high rates than speculation.

While the Fed is probably wary of repeating the 1929 mistake of using rates to slow speculation when inflation is tame, that doesn't mean the Fed is okay with home prices going up another 20% from here, much less seeing crypto and speculative stocks booming again.

The hot US stock market couldn't handle the renewed slide in bonds, leading to a decline of over 4% for a balanced portfolio of stocks and bonds for the month. Despite this, the economy remains strong, even as 30-year fixed rate mortgages approach 8%, reminiscent of the worst of the bond market hit in 2022. Banks are showing signs of strain again, as they grapple with a portfolio of long-term, low-rate loans while needing to offer rising yields to depositors.

For September 2023, our Conservative portfolio declined by 4.71%, and our Aggressive portfolio fell 3.71%. Benchmark Vanguard funds for the month were as follows: Vanguard 500 Index Fund (VFINX), down 4.77%; Vanguard Total Bond Index (VBMFX), down 2.49%; Vanguard Developed Mkts Index (VTMGX), down 3.71%; Vanguard Emerging Mkts Index (VEIEX), down 2.06%; and Vanguard Star Fund (VGSTX), a global balanced portfolio, down 4.04%.

Despite its recent drop, the S&P 500 remains up around 13% for 2023. In contrast, longer-term government bonds have experienced significant declines. A 50/50 portfolio consisting of the S&P 500 ETF (SPY) and the long-term government bond ETF (TLT) is approximately flat for the year, dividends included. Our higher-risk portfolio has registered a 1.35% return, while our lower-risk portfolio has decreased by 1.13% year to date.

The primary areas that have been performing well in the market (though some are cooling down) include technology, which is still up around 20% YTD, and growth sectors in the US. While some foreign markets like Japan are performing strongly this year, most are lagging behind the US. The strength that value stocks displayed in 2022 has waned in 2023, with these funds now in the red. Small cap stocks are barely holding ground with a 3% return for the year.

The weakest performers include assets that investors previously favored when rates were near zero and below inflation — such as gold, high dividend stocks, and utilities. These so-called 'safe' inflation hedges or assets offering inflation-beating yields are now under pressure. Utilities have fallen by 12% this year, real estate funds by over 5%, and precious metal funds have declined around 10%. Investors don't need to look far for safe yields now, as T-bills are offering around 5.5%.

Why haven't higher rates stifled the economy or the stock market as anticipated? Perhaps many had envisaged a near future that mirrored the last 15+ years, with persistent low rates to support the economy where the risk averse are punished for being too conservative. This optimistic projection is rapidly changing as the possibility of enduring higher rates becomes more evident. For those purchasing homes at current peak prices with almost 8% mortgage rates, refinance opportunities at lower rates in the coming years might become scarce.

The US economy's resilience may be partially attributed to how many Americans having locked in low rates with 30-year fixed mortgages of around 3%. Rising inflation is simultaneously pushing up home prices and salaries, and with the surge in cash yields, those brave enough to move away from their zero-interest bank accounts are seeing over 5% yields. However, challenges could be on the horizon for commercial borrowers with short-term or adjustable-rate loans.

If the aim is to curtail consumer spending to combat inflation, then tax hikes and government spending cuts might be necessary – neither of which we're currently seeing. Relying solely on rising rates to cool down the economy could lead to a financial crisis, even when consumers are still splurging on luxuries like $1000 Taylor Swift tickets.

Another factor to consider is that, at some point, government bonds might outperform stocks over a lengthy period, perhaps decades. If an investor had purchased a 20-year government bond in 2000 and, upon maturity in 2020, reinvested in T-bills, the returns would have been on par with the S&P 500, dividends included. The catch is that one would have enjoyed the consistent 6%+ yields from bonds and avoided the recent bond market crash since the bond matured in 2020.

In the current scenario, we're nearing the 6% yield for 30-year bonds seen in early 2000, with rates currently hovering around 5%. While stock yields aren't as low as they were then (meaning stocks are not quite as overpriced), they are not far off, sitting around 1.5%.

The tech innovations from 2000-2020, including the spread of the internet and smartphones, resulted in an average annual return of about 6.5% in the S&P 500 stock fund. But we also saw government debt soar from 60% of GDP to 120%. Without a similar debt-driven boost in the near future and with an aging population, economic growth could be stifled, barring any significant shifts, such as a robot-driven economy.

Ultimately, the primary hesitation against heavily investing in 5% risk-free long-term debt arises from the potential for rates to climb even further, which could further depress longer-term bond prices. Although we haven't observed panic selling of bond funds—a sign that might indicate a good entry point—such a scenario might never transpire. This is especially true if there's significant demand for 6% government bond yields. After all, achieving returns better than 6% long-term government bonds is difficult, even under nearly ideal economic conditions.