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A PUBLICATION OF FUND FAMILY SHAREHOLDER ASSOCIATION • VOL. 26, NO. 6
Rate Hike Reversals
ANTICIPATION AHEAD
of the Federal Reserve’s June 15 decision on whether to hike
short-term interest rates sent markets on a roller-coaster ride in May. Bipolar traders
switched between a “risk off” and a “risk on” posture, depending on whether they saw
another rate hike as a bad thing or a good one for the economy and the markets.
That’s nuts. The overwhelming rationale for another rate hike will be that the U.S.
economy is functioning properly, expanding well, and is showing some signs of a steady
increase in inflation—all positives for you, me and stock prices.
Employment is strong. The unemployment rate is holding at 5.0%—what’s gener-
ally considered “full employment.” The U-6 rate, which is a broader measure including
people who’ve given up looking for work but say they would work if they could find a
job, fell to 9.7% in April. The 4.7% gap between the U-6 and the headline unemploy-
ment rate is the lowest since August 2008 and right in line with its average over the past
20 years.
We’ve finally got a whiff of inflation in the air, but it isn’t more than a scent. The
Fed’s favorite inflation gauge showed a 1.1% rise over the year ending in April, up from
the prior two months but slower than in January. Even as oil has risen, inflation has
remained in check. I’d give the chance of a June rate rise 50/50 odds right now.
What tips my thinking a bit, though, is the incredibly strong income and spending report
that was released as May ended. Year-over-year income gains, after adjusting for inflation,
are at a steady rate of more than 4.0%. Rising incomes have allowed consumption to grow
at the same time that savings rates are up as well. At 5.4% in May, the consumer saving
The Independent Adviser for Vanguard Investors
and FFSA are completely independent of The Vanguard Group, Inc.
MARKET HISTORY
No New Highs, No Worries
SO IT’S BEEN
a year since U.S. stock indexes hit their all-time highs. The lack of new
highs over the past 12 months is excellent fodder for alarmist headlines, but should
investors be concerned? Absolutely not.
First, while the S&P 500’s price level last hit a high on May 21, 2015, on a total return
basis, the index hit an all-time high just two trading days ago—on May 27, to be specific.
But the media and most investors don’t focus on total returns. They focus on the index
prices, and yes, we’ve gone that full year without a record. Is this unusual? Not at all. In
fact, drawdowns are normal when investing in stocks. Allow me to paint a picture.
The first chart on page 3 shows the growth in price of the S&P 500 Index since its
March 1957 start date. The shaded regions show when the index was below its previous
DOW JONES INDUSTRIALS
May Close:
17787.20
STANDARD & POOR’S 500
May Close:
2096.96
4300
4550
4800
5050
5300
MAMF JDN OSA J J
NASDAQ COMPOSITE
May Close:
4948.05
0.00%
0.08%
0.16%
0.24%
0.32%
MAMF JDN OSA J J
3-MO.TREASURY BILLYIELD
May Close:
0.28%
1.6%
1.8%
2.0%
2.2%
2.4%
2.6%
MAMF JDN OSA J J
10-YR.TREASURY NOTE YIELD
May Close:
1.83%
15900
16400
16900
17400
17900
18400
MAMF JDN OSA J J
1850
1900
1950
2000
2050
2100
2150
MAMF JDN OSA J J
AVERAGEVANGUARD INVESTOR*
May:
0.8%
YTD:
2.7%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
MAMF JDNOSAJ JM
*See the footnotes on page 2.
Model Portfolios................................................................ 2
10 Things Vanguard Won’t Tell You—Part II........................ 4
Are ETFs Best on Taxes?. ................................................. 6
Performance Review.................................................... 8-11
Vanguard Makes the Case (Poorly)................................. 12
Taking Risk to Zero?........................................................ 13
Distributions to Come..................................................... 14
Will They or Won’t They?................................................. 15
JUNE 2016
SEE
REVERSALS
PAGE 12
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S P E C I A L E X P A N D E D 1 6 - P A G E I S S U E
>
SEE
HISTORY
PAGE 3