Investor wishes? Here are a few they’d like from the markets in 2019.
Two outstanding wishes start with our local mutual fund giant Vanguard: better technology, and more of the deeply researched investment and economic research for which Vanguard is well-regarded.
We point readers to Vanguard’s outlook for 2019, available on the Vanguard Advisors website, as well as Vanguard Chief Investment Officer Greg Davis’ expectations on interest rates and blockchain, the disruptive digital record-keeping technology underlying crypto-currencies such as Bitcoin. Interestingly, Vanguard CEO Tim Buckley told CNBC recently that he expects a balanced portfolio will return about 5 percent annually in the coming years. Vanguard CIO Davis predicted globally diversified stocks will earn between 4.5 percent and 6.5 percent annually and global bonds will generate returns of 2.2 percent to 4.2 percent annually.
Meanwhile, Vanguard founder Jack Bogle expects stocks to earn 4 percent over the next decade while he predicts bonds earn 3.5 percent. Bogle doesn’t believe in investing overseas, so it’s no surprise he projects lower returns at home than Buckley and Davis think they’ll earn in foreign markets.
As my colleague Joe DiStefano wrote recently, Bogle has just published “Stay the Course,” his 12th book in which he retells familiar Vanguard stories and industry questions with some new detail. The emphasis is again on low fees, market-index targets, clarity, and structural exceptionalism (The company is owned by its funds, not its founders or outside shareholders. Bogle says that’s key, while acknowledging not quite everyone agrees.)
Vanguard Advisor Services issued a fascinating chart last week pointing out that government shutdowns often trigger volatility and market sell-offs, but those rarely last.
Vanguard in 2018 also again cut costs for nearly 1.5 million clients in its low-cost Admiral Shares, dropping minimum investment requirements from $10,000 to $3,000 for 38 index funds.
What investors want less of from Vanguard? Bizarre technology outages and notifications like yet another one last week.
Vanguard emailed some customers just before Christmas, blaming a “technical error” related to dividend distributions. A number of bond funds paid out small capital gains on Dec. 21 and should have been reinvested the same day. The transactions should have shown up in online accounts right away. Instead, Vanguard says it won’t be processing the transactions until the day after Christmas or perhaps even a week late. “That’s not to say that they won’t be reinvested at the closing price on the 21st, but just that Vanguard couldn’t process them for almost a week,” said Independent Advisor for Vanguard Investors newsletter writer Dan Wiener in a note to his clients.
Vanguard devotees, affectionately named the “Bogleheads” after the founder’s low-cost investment philosophy, soured on the news, which prompted the $5-trillion-in-assets mutual fund firm to post a response on the Bogleheads website. “With Vanguard being closed for the weekend, I wanted to respond and assure you that we are aware of the problem that affected some of our bond fund dividend payments and are working to rectify it,” wrote Vanguard’s Rebecca Katz. “I’m sorry we caused you concern, but rest assured, we’ll fix it, and keep you posted.”
Yield curve & recession
We share some terrific finds from economist Ed Yardeni, president of Yardeni Research. In particular, his excellent explanation about the Treasury bond yield curve (the difference between short- and long-term bond yields), what it tells us, and why it is closely watched as a predictor of recession.
The shorter-term Treasury bonds just “inverted,” meaning we now get more yield investing in a 2-year Treasury than a 5-year Treasury.
“The question of why the yield curve has consistently inverted prior to recessions remains. One widely held view is that banks stop lending when the rates they pay in the money markets on their deposits and their borrowings exceed the rates they charge on the loans they make to businesses and households. So an inverted yield curve heralds a credit crunch, which inevitably causes a recession,” Yardeni wrote in a recent client note.
In a Dec. 5, 2018, post on Eaton Vance’s Advisory Blog, Andrew Szczurowski argues that “the market is looking at the wrong curve. What really matters, in my mind, is what is happening to the curves at banks. The rates banks are charging for a mortgage are up 150 basis points (1.5%) from their lows. This is the first hiking cycle where banks’ margins are actually increasing as the Fed is hiking rates. The reason being, they aren’t paying their depositors much more today than they were over the past few years.”
What matters is the net interest margin of the banks, Yardeni added. Data for all FDIC-insured financial institutions show that net interest margins increased from a recent low of 3 percent in 2015 to 3.5 percent in 2018. That coincided with the Fed’s program to normalize the federal funds rate, up from 0-0.25 percent in late 2015 to 2-2.25 percent currently, Yardeni added.
Bottom line from Yardeni: Despite this year’s flattening of the yield curve, there’s no sign of a credit crunch.