Catch Up With the Markets

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Federal Reserve Chair Janet Yellen’s comments rocked the boat last Wednesday when she said that stock valuations were “quite high” and that long maturity bonds could be hurt if interest rates rise.

Weeklys Can Offer a Better Way to Play the NewsThanks for the news flash! Six years into a bull market, we would expect valuations to be high, and the warning bell of rising rates has been ringing for years now. Yellen also said that she sees signs of investors reaching for yield. Wasn’t that the point of holding interest rates at zero for so long?

Moving along. The economic data continues to be mixed, as has been the hallmark of this slow growth, not no growth environment. Vehicle sales in April slipped from March’s level but still came in at a robust 16.5 million annual pace. Construction spending also dipped in March but is still higher than it was a year ago.

The Institute for Supply Management manufacturing headline number of 51.5 indicates growth, and most components were strong. However, the exception was the employment component, which contracted in April for the first time since May 2013. The weak employment component dovetails with a disappointing ADP payrolls report.

Offsetting those weaker data points, the official employment numbers released on Friday were solid. Over 200,000 jobs were created in April, the unemployment rated ticked down from 5.5% to 5.4% and average hourly earnings increased. Still, it wasn’t an entirely positive report as March’s weak number was revised even lower. So, we’ll be keeping an eye on May and June numbers to see if they follow April’s lead or sink back toward March’s level.

The service sector is carrying the economic day at this time. The ISM non-manufacturing report pointed to a strong service economy, which saw robust new orders, a backlog of orders and signs of future hiring. The service sector tends to be less influenced by weather than the manufacturing economy and points to a spring rebound in the economy if other sectors simply play catch-up.

Greece continues to make headlines, and with a payment to the IMF due this week, those headlines are heating up. I could tell back in February, when Greece and the European Union agreed to a four-month extension, that there would be more scenes in this drama. That is what we are seeing playing out today.

It has been a rocky start to May in the markets, particularly in the bond market. The yield on the 10-year Treasury rose from 2.05% at the end of April to 2.18% last Thursday night. With those rising yields comes falling bond prices, and leading the way down this month is Vanguard Extended Duration ETF (NYSEARCA:EDV), off 4.8%, and Vanguard Long-Term Treasury (MUTF:VUSTX), which is down 2.1%.

The losses haven’t been limited to bonds: Vanguard Total International Stock ETF (NASDAQ:VXUS) is off 1%.

Finally, turning to Malvern, Vanguard broadened access to its Personal Advisor Services. The service, which I’d describe as a robo-adviser with a personal touch, has been tested in a pilot program for the past two years for clients with $100,000 or more. Vanguard officially rolled out the service and lowered the minimum to $50,000. The annual fee remains unchanged at 0.3%.

What you’ll get is a cookie-cutter index-heavy portfolio, similar to other robo-advisers like Wealthfront or Betterment, but unlike those firms, you’ll have a human adviser to talk to. If you are okay with a nearly all-index approach and want an adviser to talk to, whether for planning reasons or to help coach you through difficult markets, then this could be a fit for you at a low cost.

If you don’t need the planning or the human touch, don’t want to do it on your own and still want an all-index portfolio, I’d save yourself the 30 basis-point fee and simply look to a Target Retirement fund or Star LifeStrategy fund. You’ll get substantially the same investment experience.

Editor Dan Wiener and Research Director Jeffrey DeMaso publish The Independent Adviser for Vanguard Investors, an award-winning monthly advisory letter that keeps subscribers abreast of recent developments at Vanguard, and provides long-term guidance for investing in the Vanguard fund family.

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