(PUB) Investing 2016

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The Independent Adviser for Vanguard Investors • October 2016 • 3 FOR CUSTOMER SERVICE, PLEASE CALL 800-211-7641
Daniel P. Wiener - Senior Editor
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RECORD FROM PAGE 1 >
Vanguard’s stable, dropping 2.3%. And
the Fed had nothing to do with it. Blame
Wells Fargo, whose CEO, John Stumpf,
was hauled before Congress to explain
how thousands of employees had com-
mitted fraud, opening millions of check-
ing and credit card accounts without
customers’ knowledge. Another culprit
is Deutsche Bank, whose shares hit a
record low as the German bank negoti-
ated a multi-billion settlement with the
U.S. Justice Department related to mort-
gage securities. I doubt there were many
investors worried about these issues a
month ago. The question: Is Deutsche
Bank the next Lehman Bros.?Yes or no,
I doubt they are about to put the global
markets into a tailspin.
On the other end of the spectrum,
Energy had a good September, gain-
ing 2.7%, and is having a great year,
up 26.2%—second best among all
Vanguard funds. Energy ETF gained
3.4% in September and is up 19.9%
on the year. The latest boost was,
obviously, the aforementioned com-
mitment by OPEC to curtail produc-
tion. I’m a skeptic. The exact agree-
ment still needs to be worked out, and
then OPEC’s members have to follow
the rules—something that hasn’t hap-
pened in the past. (So why now?)
Even before the OPEC announcement,
though, Energy’s fortunes have ben-
efitted from the rising price of oil,
which, after briefly falling below $30
a barrel in February, has stabilized in
the $40 to $50 range. While that is
well below the $100-a-barrel level of
two years ago, the end to free-falling
oil prices has allowed beaten-down
energy stocks to rebound.
When it comes to our Model
Portfolios, energy and financial stocks
are not the primary sectors driving
returns. Dividend Growth has only
3.1% in energy stocks and 15.3% in
financial stocks. Capital Opportunity
has even less, with just 0.6% in energy
and 3.9% in financials. The health care
sector is a bigger piece of the Model
Portfolios, and—let’s not beat around
the bush—it’s been a tough year. Health
Care , down 3.2% so far in 2016, has
been the worst-performing Vanguard
fund. While that’s certainly frustrating,
and I feel the pain right alongside you,
I know there will inevitably be peri-
ods when the fund underperforms—no
strategy outperforms all the time. If you
find yourself questioning a position in
Health Care, you should flip directly
to my interview with portfolio manager
Jean Hynes on page 12.
Now that the third quarter has come
to an end, one feature that separates
it from the first two quarters of the
year is new highs. The Dow Jones
Industrial Average and S&P 500 both
hit all-time highs for the first time this
year in mid-July, and those indexes
went on to hit eight and nine subse-
quent highs, respectively, after that
date. At the end of the quarter, the
indices were within 1.0% (the S&P) to
1.8% (the Dow) of those peaks. And
it wasn’t just U.S. markets (includ-
ing the NASDAQ Composite, by the
way) making new highs, as markets
in Mexico and Russia also set new
apexes in the third quarter.
Among Vanguard’s 60 stock funds
with Investor shares, fully 25% are
within 1% of their all-time highs, with
all three PRIMECAP Management-
run funds the closest to their prior
peaks, down just 0.09% to 0.22%.
Half of the 60 funds are within 2%
of their all-time highs. The funds that
still have the most catching up to do,
despite a strong 2016, are Precious
Metals & Mining, which is 57.4%
below its high, Energy, 26.5% below,
and Emerging Markets Stock Index ,
off 18.6% from its prior peak.
Long-term shareholders may not be
smiling, but at least they’ve cut their
losses a bit. Precious Metals & Mining
is up 80.0% this year (though it was
up 102.6% in early August). Energy’s
26.2% return is just shy of its best gain
for the year, a 28.0% rise hit in early
September. Emerging Markets Stock
Index, up 16.0%, is less than three
percentage points below its 2016 peak,
also hit in early September.
As we move into October, you can
expect to hear the fear mongers spewing
silliness over the fact that the Chinese
yuan has officially been recognized
as a “reserve currency” by the IMF
beginning on the first of the month. No,
this is not going to destroy the dollar’s
position as the single strongest global
currency. But given the penchants of
the worst pundits for finding reasons
to sell stocks and buy gold or other
esoterica, this is bound to become part
of the popular meme for a week or two.
Keep your wits about you and drown it
out—it’s nonsense.
Speaking of dollars and cents, yields
on municipal money market funds have
caught up to their taxable siblings. In
mid-September, Tax-Exempt Money
Market’s yield went ahead of Prime
Money Market’s, and at the end of the
month, the muni fund’s yield was 10
> SEE RECORD PAGE 16