Monday, Mar. 9, marked the six-year anniversary of the U.S. stock market bottom following the credit crisis. Since the bottom, the Vanguard 500 Index Fund (MUTF:VFINX) has returned an outstanding 240%, or 22.6% a year.
However, if we instead measure from the prior market top, about seven and a half years ago, in October 2007, the Vanguard 500 Index Fund is only up 52%, or 5.8% a year. So, are we in a raging bull market or a ho-hum growth phase?
It all depends on your perspective. It’s fairly safe to say that the next six years won’t see returns as strong as those from the last six, but just because the last six years were strong doesn’t mean we are poised for a crash.
Unfortunately, that’s how some traders must have seen it. Last Tuesday, the Dow Jones Industrial Average dropped 332 points and pulled the index into negative territory for the year. But again, perspective matters.
That 332-point drop was only a 1.8% decline. It wasn’t the first 300-point decline of the year either — that happened in early January — nor is it likely to be the last. And U.S. stocks are still only 3.5% or so off the highs hit just last week. Sure, this could be the start to the long-awaited stock market correction, but we won’t know until after it happens. Having a diversified portfolio is a good way to make sure you are prepared for a market correction — and whatever else the market might throw at you.
Turning to economic items, the Federal Reserve stress test results were announced after the markets closed last Wednesday, but what investors were most interested in was the level of stock buybacks and dividend increases that banks would be allowed to make for the current year.
The actual announcements were all over the map, with Citigroup Inc‘s (NYSE:C) dividend rising from a penny to a nickel and Morgan Stanley‘s (NYSE:MS) from 10 cents to 15 cents per share. Citi instituted a $7.8 billion buyback, up from $1.2 billion last year, while Morgan Stanley tripled its from $1 billion to $3.1 billion.
Yet, JPMorgan Chase & Co. (NYSE:JPM) actually reduced its announced buyback by about $100 million, from $6.5 billion last year to $6.4 billion this year. Steady-Eddie Wells Fargo & Co (NYSE:WFC) raised its dividend just 7% and said its previously announced $17 billion buyback was proceeding apace. Bank of America Corp (NYSE:BAC), despite announcing a $4 billion buyback, remains under provisional status, as it needs to reassess its risk measures before getting final Fed approval. BAC has until Q3.
What does this mean for prices? Well, over the past year or so financial stocks have, as a group, about matched the stock market returns. But with the stress tests mostly behind them, this puts a bit of a tailwind behind bank stock prices, which have recently been under pressure as analyst projections have been reduced. With the stock market roaring ahead last Thursday, financials were looking strong, with the Vanguard Financials ETF (NYSEARCA:VFH) up 2.1%.
Retail sales were anything but positive. February’s sales were down from January’s, which were down from December’s, which were down from…well, it’s been three down months in a row. Household balance sheets are strong, and savings are good, but spending is not cutting it. This has to be one fly in the ointment for the Fed as it looks ahead to possibly raising interest rates this summer.
On the other hand, last Friday’s jobs numbers were strong, and were supported this week by a strong Jolts report (the report on job openings and how many people are changing jobs) — the labor market continues to heal. But rather than worry about jobs, which was last month’s news, now the worry is about the strength of the U.S. dollar.
The dollar’s gain is symptomatic of the U.S. leading the world out of the financial crisis. Remember that several years ago, the U.S. led Europe and, to a lesser extent, Asia into the financial crisis, and obviously we’ve led on the way out as well. And, as foreign policy makers have cut interest rates in their own versions of ZIRP (or zero interest rate policy), and the European Central Bank started its own 1-trillion euro quantitative easing program last week, the dollar and the U.S. Treasury bond have remained the strongman in the world currency markets.
Should the Fed raise rates in the next few months, that will continue to put pressure on foreign currencies.
At the same time, folks are decrying the strong dollar right now, but (1) this means that U.S. dollar consumers are more apt to buy foreign goods, which is a positive for the weakened foreign economies, and (2) the dollar was in a free-fall against the euro from about 2001 through the middle of 2008. In fact, we only recently strengthened back to where the euro/dollar relationship began in 1999.
The point is that the currency markets are extremely cyclical. However, as investors with money in overseas markets, we are happy to see the dollar strengthen as we are buying with a strong currency. And, when the inevitable turn comes, we’ll be selling out of strong currencies.
It’s worth thinking about the “sturm und drang” around the Fed’s possible interest rate moves this summer. What seems missing in all this dialogue about “patience” and will-they-or-won’t-they raise rates in June is the fact that one or even two or three interest rates hikes will leave us in a very, very accommodative posture. Rates are low, and will remain low for a very, very long time. Worrying about 25, 50 or even 100 basis points over the next year or so reflects a manic trader mentality, rather than an investor mentality.
Plus, there is absolutely no reason to believe that Yellen’s Fed will begin a series of rate hikes once it starts — à la Greenspan or Bernanke. It could easily be on-again, off-again as the economy and the markets digest, say, one or two hikes.
Turning to Malvern, Vanguard can’t seem to get its story straight on the new Vanguard Ultra-Short-Term Bond (MUTF:VUBFX) fund. According to its institutional web site, the fund’s two share classes paid out fractional distributions at the end of February. Yet, take a look at the Vanguard “investor” site, and you’ll see that there have been no distributions — or as Vanguard puts it, “There are no distributions to date for this fund.”
What’s the story? Well, indeed Vanguard did pay out small distributions at February-end, but I guess with the revamp of the “personal investor” website the data got lost in the sauce. Frankly, I don’t understand this website redo. In many ways, it buries information deeper and deeper. Why, for instance, does it take so much searching and clicking to find a list of all Vanguard’s funds? By my calculations you need to click through three times — once you find the right links, which is no small feat — to get a list of Vanguard’s funds.
Daniel P. Wiener is editor of 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.