The Fed’s minutes from the October meeting were released on Wednesday, and while the Fed maintains that it will begin to taper sometime in the coming months, it wasn’t exactly saying when. I’ve never thought that tapering was imminent, as the many “ifs” that Chairman Bernanke spoke about in his June comments suggested there was still a long way to go before tapering would take place. And don’t forget that tapering is not a full stop on stimulus, but rather a slow reduction. The Fed may have its foot on the pedal now, but easing off a bit doesn’t mean they are taking their foot off entirely, or slamming on the brakes. And it isn’t out of the realm of possibility that if they saw signs of slowing once again they would push the pedal back down a bit.
But where’s the inflation? CPI came in with a 0.1% decline in October, making the 12-month inflation rate 0.9%. The core rate which excludes food and energy was up 0.1% in October and is up 1.7% year over year, which is more like it, but it sure isn’t the 2% or 2.5% the Fed is looking for. Producer price inflation also remains subdued. PPI declined 0.2% in October and is only up 0.3% over the past year. Core PPI is up just 1.4% on the year.
Those who predicted that quantitative easing would lead to high inflation — and in some cases hyper-inflation — may have garnered lots of headlines, but they have been far off the mark. And those who have invested on that call have almost certainly been disappointed this year. Vanguard Inflation-Protected Securities Fund (VIPSX) is down 7.8% on the year, and Vanguard Precious Metals & Mining Fund (VGPMX) is down a whopping 36.8%.
Speaking of Precious Metals & Mining, on Tuesday long-time portfolio manager Graham French of M&G Investment Management announced he was stepping down from day-to-day management of the fund. Randeep Somel, who replaced Matthew Vaight as co-manager in January of this year, assumes sole management duties until a new co-manager is named. Senior Editor Dan Wiener and I are not overly concerned by these changes, though we don’t rate the fund very highly to start with. This is the third manager change in a month or so at Vanguard, as there is some changing of the guard heading into the new year.
How would you react if you hadn’t been paying lots of attention and on Saturday opened the paper and over coffee read that the Dow had dropped 1,000 points that week? From Wednesday’s close, that’s a mere 6.3% decline. That’s not even a correction. The Dow would have to drop 1,590 points (or 1,600 from today’s close) to see a typically-defined correction of 10%. The difference between where we are today and where we’ve been is that the numbers are getting bigger, and for some investors that might become quite scary. A 100-point drop today would be a mere 0.6% decline. Even a 500-point drop would be just 3.1%. But 500 points sure sounds scary. So could it happen? Well, there’ve been 37 one-day declines of 3.1% or more over the past decade. And there have been 511 days of 0.6% declines or greater.
I’m not calling for a stock market decline today or tomorrow. The takeaway is that a Dow point today isn’t what a Dow point used to be. Don’t let the headlines knock you off track.
Senior Editor Dan Wiener and Editor/Research Director Jeffrey DeMaso publish The Independent Adviser for Vanguard Investors, a monthly newsletter that keeps abreast of recent developments at Vanguard, and the annual FFSA Independent Guide to the Vanguard Funds.