Don’t Get Too Caught Up in Headlines

The Greek debt drama continues to unfold in the headlines as Greece and its creditors — mainly the European Central Bank and the International Monetary Fund — can’t strike a deal.

Small Caps

Yesterday, Greece said it would defer a payment to the IMF due today. “Defer” sounds like a polite way to say “default” to my ears, but Greece says it will bundle all of its payments due to the IMF into one lump sum at the end of June.

So, the dreaded d-word — default — is avoided for another day, and the headlines will continue to roll in and roil investors.

But as I’ve cautioned all along, don’t get overly worked up by the headlines. For some context, the S&P 500‘s broadest index for Greece includes less than 40 stocks, with a total market capitalization of under 20 billion euros — the total European stock market is worth 10 trillion euros or so. The IMF and ECB hold the vast majority of Greek bonds. Greece’s economy is less than 1.5% of Europe’s overall GDP.

My point is that defer, delay, default or exit — whatever comes next in the Greek story line — could be painful and have ripple effects but ultimately should be bearable.

Turning to the U.S. economy, while sentiment regarding the service side of the economy took a dive in May with some lingering worries about West Coast port issues and the avian flu that struck a number of poultry producers, the month’s Institute for Supply Management manufacturing report was a vast improvement over the prior couple of months.

Although, there’s more room to move before we can definitely say that manufacturing is back on track — at least back on track via the data streams we see. In fact, there seems to be plenty of evidence that the economy is turning up.

Auto and light truck sales were strong in May, driving to their highest annualized levels in nearly a decade. Was this simply “catch-up” buying making up for the cold weather months or something more? We won’t know that until we’re a bit further down the road.

Personal incomes rose in April after a flat March, putting the metric back on track for slow, steady expansion. Consumption, on the other hand, was unchanged, which confirms some of the other data we’ve seen on spending and the like which suggests households remain tight-fisted when it comes to their wallets. Savings rates have been rising for months now and remain much higher, at 5.6%, than the average of 4.7% over the past decade.

Just about any way you slice it, inflation remains subdued. This week’s report showed core personal consumption expenditure, which is the Federal Reserve’s preferred inflation metric, up only 1.2% over the past twelve months. The low level of inflation is one reason the IMF is now getting into the act suggesting that the Fed hold off on raising the fed funds rate until mid-2016.

While the Fed, IMF and pundits debate the timing of a fed funds rate hike, the yield on Vanguard Prime Money Market Fund (VMMXX) doubled on Tuesday and has been at 0.02% for three days and counting now!

Okay, I realize that two basis points (or 0.02%) are still next to nothing, but it’s the first time in nearly two years — since July 26, 2013 to be specific — that the Vanguard Prime Money Market Fund has paid out a yield of more than 1 basis point. How long will this 0.02% yield last? Does it signal higher yields to come? Only time will tell, but they couldn’t go much lower!

Higher yields haven’t been limited to VMMXX, as bond yields have been rising across most of the globe. For instance, the yield on the 10-year German bund was near zero in mid-April, but is now approaching 1%.

With rising yields come falling prices, and with falling prices come dramatic headlines. One headline recently proclaimed, “Bond Rout Wipes Out 2015 Gains as Traders Stay Glued to Screens.” But don’t get caught up in the headlines or worry too much about traders.

And remember, you don’t have to buy an index fund. Several bond funds are holding on to gains this year, including some of my favorites, which are up 0.9%, 1.0% and 2.8% for the year through the end of last week.

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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