Super-Strong Bull Market Eludes Most Fund Investors

Super-Strong Bull Market Eludes Most Fund Investors

Aside from the truly awful consequences of the coronavirus in terms of lives lost and the disruptions to our lives, there has been a big toll on those who use funds to try to create a path to their financial well-being. But, fortunately, for those investors who did not panic and stuck with their portfolios, the financial course appears to have begun the process of righting itself. While this almost always is what happens following chaos and uncertainty, the process may be a slow one before life, in all respects, begins to return to a more normal track.

For investors, two important trends summarize how the investment environment has changed as explained below.

The Virus Appears to Have Changed the Trajectory of Stocks and Bonds

You may be surprised to realize that, in spite of the fact that we currently are in a super-strong, recovering bull market after a deep COVID-19-induced bear market, all is not nearly close to being back to normal. Yes, the S&P 500 and, especially, the NASDAQ indices, are now up for the year, with the Dow Jones Industrial Average down just a few percent in spite of the pandemic. But does this mean that the negative impact of coronavirus on your funds has been largely overcome? For typical fund investors, not by a longshot.

Most investors probably hold a diversified group of different funds drawn from different fund categories. Look at the following category averages for different types of funds, followed by the performances of two “benchmark” type of index funds, one for international stocks and the other for bonds. Note that the COVID-19-induced bear market began on Feb. 20. So, if you held on to your positions from that date right up to now, let’s see how you have done compared to how you would have done holding those same positions during the immediately preceding 12 months using fund category averages as our measures of performance.

Morningstar Fund Category

Pre-Bear Market Onset1 Yr. Return

Subsequent Return (Not Annualized)

Return Difference Between Pre- and Post-COVID-19

Large Blend

23.16%

0.99%

-22.17%

Large Growth

31.23

13.38

-17.85

Large Value

10.07

-14.56

-24.63

Mid-Cap Blend

15.71

-7.71

-23.42

Mid-Cap Growth

24.77

12.41

-12.36

Mid-Cap Value

6.46

-21.46

-27.92

Small-Cap Blend

9.55

-17.22

-26.77

Small-Cap Growth

12.75

4.65

-8.10

Small-Cap Value

-1.33

-24.97

-23.64

Note: Pre-Bear Market Onset 1 Yr. Return from 2/19/19 – 2/18/20; Subsequent Return from 2/19/20 – 9/30/20

International Fund

Pre-Bear Market Onset1 Yr. Return

Subsequent Return (Not Annualized)

Return Difference Between Pre- and Post-COVID-19

Vanguard Total Intl. Stock Index Fund (VTIAX)

10.65%

-4.29%

-14.94%

Bond Fund

Pre-Bear Market Onset1 Yr. Return

Subsequent Return (Not Annualized)

Return Difference Between Pre- and Post-COVID-19

Vanguard Total Bond Mkt. Fund (VBTLX)

9.66%

4.75%

-4.91%

Prior to the onset of the COVID-19 bear market, 10 out of 11 fund categories had just completed a positive prior 12 months. However, after the start of the bear market, only the three categories of growth stocks as well as bonds have been able to provide positive returns above 1%. The remaining 7 fund categories have averaged a return of -12.75%.

The three categories of value funds, small, mid, and large cap, have done the worst. The “plain vanilla” bond fund, VBLTX, has served its investors well, far outperforming the seven underperforming stock funds.

As the tables show, each of the 11 categories hasn’t returned the level of performance it had prior to the COVID-19-induced bear market. The difference between the pre-and post-virus returns have, for the most part been huge, as shown in the last column with an average drop-off in performance of -18.79%. It will take a massive improvement for all of these still lagging categories over the next 5 mos. or so to equal the 1 yr. returns prior to the onset of the now-defunct bear market. While this remains a possibility, the 10 stock funds would have to increase, on average, more than 4% per month from where they sat at the start of the bear market to equal the returns prior to the onset of the COVID-19-bear market, while the Vanguard bond market fund would have to average a return of about 1% per month.

In Response to COVID-19, the Fed Pushed Interest Rates to Near Zero

In my July article published on Seeking Alpha at the beginning of July, I recommended that investors should shun cash and instead invest in bond funds for the majority of their portfolio that they choose not to invest in stocks, that is, instead holding money in cash.

While it is reasonable to think that, if bonds now pay only scant dividends, their returns will be paltry as well. So, let’s now look at returns for bonds since the beginning of July.

The July article shows how some popular bond funds have done following my recommendation to go into bonds instead of cash. For comparison, I have also shown how the typical money market fund has done over the same 3-month period.

Fund (Symbol)

3 Mo. Return

Potential*12 Mo. Return

Vanguard Short-Term Investment-Grade Inv (VFSTX)

0.91%

3.64%

PIMCO Total Return Instl (PTTRX)

1.49

5.96

Vanguard Inflation-Protected Secs Inv (VIPSX)

2.95

11.8

Vanguard Total Bond Market Index Adm (VBTLX)

0.61

2.44

Vanguard GNMA Inv (VFIIX)

-0.20

-0.80

PIMCO Real Return Instl (PRRIX)

3.44

13.76

Vanguard Short-Term Infl-Prot Sec Idx Adm (VTAPX)

1.70

6.80

Dodge & Cox Income (DODIX)

1.48

5.92

Note: *Potential 12 Mo. Return shown is hypothetical beginning July 2020 and based on assumption that fund maintains same 3 mo. rate of return over the next 9 mos.

Typical Money Market Fund

3 Mo. Return

Potential* 12 Mo. Return

Cash

0.03%

0.12%

Clearly, you will find that the more money you had invested in almost any bond fund, as opposed to the average money market fund, the better you did over the last three months. Since the Fed has recently further reaffirmed its intention not to raise interest rates over the next several years, bond funds should have no trouble beating just holding money in cash.

The positive returns reflect the fact that many investors are tending to withdraw money from stock funds and transferring it into bonds in the face of stocks’ high degree of volatility since COVID-19 struck. What many analysts and investors seem to be missing in eschewing bond funds due to low interest rates is that supply and demand determine an investment’s return, not just the level of interest rates. So, as long as money continues to flow into bond funds, their total return should continue to add to their meager dividend payments. And while dividend payouts are obviously important to many income-seeking investors, utilizing higher total returns instead from their bond funds by periodically withdrawing gains from bond funds under this favorable scenario can provide a higher source of incoming cash.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have positions in all the funds mentioned except VTIAX.

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