The Independent Adviser for Vanguard Investors
•
July 2014
•
3
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year. On the other hand, as Jeff and I
will show you on page 13, you have to
take Treasury yields in the context of
the global markets.
While the stock bull market is now
more than five years old, I don’t think
it’s over by any means. For some time,
I’ve been saying that this has been an
abnormally slow grind of an economic
recovery and expansion. I talked a bit
about this in the June 12
Hotline
, but
let me repeat that what we are experi-
encing is a very drawn-out expansion.
Labor markets have now recovered all
of the jobs lost in the recession, and the
unemployment rate has inched down to
6.3%; the housing market is growing
again; the leading economic index is
still well below its prior high but head-
ing in the right direction; and overall
economic growth is, well, stuttering
forward. The latest report showing that
GDP contracted by 2.9% in the first
quarter is clear evidence that it’s not all
smooth sailing, but remember that what
happened primarily during the bitterly
cold months of January and February
is well in the rearview mirror, and more
current indicators show that the econ-
omy was merely stalled, not stymied.
The fact that many investors are
still anxious about the stock market
gives me some measure of comfort. I
haven’t had a New York cabbie talk to
me about stocks in a long, long time.
The recent outperformance of utilities
and REITs (
Utilities Index
is up 17.9%
and
REIT Index
is up 17.6% year to
date) is another sign that investors are
focused on yield, and what those seg-
ments of the markets can do for them
now, as opposed to what others can do
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SUMMERTIME
FROM PAGE 1
>
for them long-term. Short memories are
an investor’s Achilles’ heel. Last year
REIT Index was up just 2.3% compared
to a stock market up more than 30%,
and during the last market downturn,
it cratered 68.3%. That’s a ton of risk
to be taking for a step up in current
income.
One thing we haven’t seen so far this
year is an adverse market reaction to
the seemingly daily onslaught of dev-
astating news from the Middle East and
further afield. Whether it’s the “ISIS
crisis” or the continued game of politi-
cal and humanitarian chess in Ukraine
and Africa, stock and bond market
investors seem to have taken the turmoil
in stride. Oil prices have moved higher
by about 10%, but that’s not a panic,
and after hitting a high of almost $107
per barrel, the price has actually fallen a
bit closer to $105 lately.
Energy
, down
6.8% for the year in early February, is
now up 14.2%. If you’re looking for
volatility, you can find it there, or say,
in
Emerging Markets Stock Index
,
which was down 9.0% earlier this year
and is now showing a gain of 6.9%.
Precious Metals & Mining
may be up
12.9% this year, but it remains more
than 57% below the high established in
May 2008.
While investor sentiment for some
of these volatile sectors has waned
and waxed, the steady-Eddies in our
Model Portfolios
are generating a much
more comfortable ride for you and me.
Halfway through the year, we’ve earned
returns ranging from 6.2% to 6.9%,
compared to
Total Stock Market
’s
6.9% gain, and as you’ll see on page 2,
the long-term numbers and risk we’ve
experienced put straight indexing strat-
egies to shame. Am I concerned that
International Growth
, up just 2.3%,
is lagging
Total International Stock
’s
5.8% gain? Not at all—six months
do not make a performance record
for long-term investors like us. Ditto
Dividend Growth
, which may be up
just 4.6% but is still ahead of its index-
fund sibling
Dividend Appreciation
Index
’s 4.5% return.
As I look ahead, rather than in that
rearview mirror, I see more signs of a
slow-growth, not no-growth economy
that should provide us with further
profits as the year progresses. Are there
potholes in the road ahead? I’m betting
on it. That’s why you and I keep our
wits about us and a few bond funds
in our portfolios, from
Short-Term
Investment-Grade
and
Intermediate-
Term Investment-Grade
, up 1.7%
and 4.5%, respectively, to
High-Yield
Corporate
, up 5.0%. Their income
yields act like shock absorbers when
the road gets rough, yet the cost of their
insurance is not prohibitive. We may
not be livin’ easy, but I’d say our intelli-
gent diversification means we’re living
easier as the markets and world events
churn around us.
n
Recovery Is Simply
Taking Longer
5/60
5/66
5/72
5/78
5/84
5/90
5/96
5/02
5/08
5/14
0
20
40
60
80
100
120
Leading Economic Index
Period of Recovery
