It’s been a good half year for stocks, money market funds and, to a lesser extent, bonds – so good compared to last year that you might even want to celebrate when looking at your quarterly portfolio review.
But this rosy picture doesn’t reflect the overall situation for the mutual funds and exchange-traded funds used by most American investors.
On the one hand, while recent market returns are real, the reports lack key information that would make the returns look less fabulous.
A quirk in the government’s calendar and disclosure rules results in fund numbers looking significantly better whenever periods of poor performance are too far in the past to be included in the quarterly reports required for exchange-traded funds. That’s what happened last quarter, when 2022’s abysmal earnings failed to be fully portrayed in its utter awfulness.
On the other hand, bond yields, which were positive for the calendar year, have recently fallen. This is mainly due to the uncertainty about the economic situation and the prospects for inflation and interest rate increases. Although inflation fell to an annualized rate of 3 percent in the latest CPI report, the Federal Reserve is likely to hike rates again at its next meeting on July 25-26 and may do so at subsequent meetings. Bonds could suffer.
Only money market funds – which are often dismissed as a form of “cash” and not counted among the big investment groups – are in a clearly positive position. The average return for the top 100 money market funds tracked by Crane Data is 4.94 percent, up from 0.6 percent a year ago, and many funds are paying more than 5 percent annually.
When the Fed raises federal funds rates, money market fund rates follow suit. “I think they’re going to keep going up for a while,” said Peter G. Crane, president of Crane Data of Westborough, Massachusetts, in an interview. The good times for money market funds are not quite over yet.
But for longer-term investors — more those with a decade-long horizon — the returns of stocks and bonds matter more than those of inherently short-term money market funds. And the latest stock and bond numbers don’t change the big picture at all. The stock market tends to outperform bonds and investments over long periods of time, but at the cost of much greater volatility.
Gaudi returns
Something strange has happened to stock and bond fund returns this year, but you might not realize it unless you take the time to look under the hood, as Daniel Wiener, chairman of Adviser Investments in Newton, Massachusetts, said. stressed in an email.
He pointed out that the 12-month performance figures for a large number of funds had shifted from being clearly negative in the first quarter of this year to being clearly positive in the second quarter. This shift had little to do with recent stock and bond performance.
Instead, it was about what happened last year and how the dismal market in 2022 is reflected in the 12-month performance results.
“Massive increases” were recorded for the second quarter, said Mr. Wiener, but these should not be taken at face value. “It all depends on the points in time over which returns are measured,” he added.
Keep in mind that the first half of last year was traumatic for many investors, particularly the second quarter. Those four months were included in the 12-month returns investors got on their spring fund statements, but they fell out of the 12-month returns through June that people are tracking now.
For example, the S&P 500 was up 15.9 percent in the calendar year through June, a strong six-month rise, no question. In the 12 months to June, it rose an incredible 17.6 percent.
But consider the numbers, which were correct only a month earlier — but were never seen by most fund shareholders because those numbers didn’t conform to the quarterly reporting schedule mandated by the Securities and Exchange Commission.
The S&P 500 was up 8.9 percent for the calendar year through May, still a decent gain. But the amazing thing is that the 12-month gain for this index through May was just 1.2 percent.
The 12-month return on the S&P 500 rose 16.4 percentage points in just one month. And the higher return reported in June, the 12-month rise of 17.6 percent, is the commonly seen metric that prompts far more optimistic feelings about the stock market than a mere 1.2 percent return.
What happened? Two things.
The stock market rose 6.5 percent in June. But the more consequential change was the S&P 500’s 8.4 percent decline in June 2022. That one-year monthly loss was included in the 12-month return through May 2023, but was not included in the far more important June 2023 quarterly report.
A bigger picture
Using data provided by Morningstar, a financial research firm, I found that this pattern extends across many fund types.
Equity and bond investors in mutual funds and ETFs posted positive returns on average for both the second quarter ended June 30 and the first quarter ended March 31.
Still, average 12-month returns for stocks and bonds have shifted radically from quarter to quarter, largely due to events in 2022 rather than this year.
Here are the figures for the last quarter:
And here they are for the first quarter, just three months earlier:
So what is the real picture here?
Put simply, the stock and bond markets are up this year but were down last year. Most investors have lost money since the market peaked in January 2022. Over the longer periods the SEC requires for standard fund returns — one, three, five, and 10 years and from fund inception — broad stock market funds are generally positive. Bond funds tend to be positive over longer periods – five and ten years or more – but negative over one and three years.
Strange things also happen with longer-term returns. Even seemingly stable 10-year returns can vary wildly from month to month, shifting investors’ perceptions of the strength of the market. That happened four years ago.
As I pointed out at the time, from September 7, 2007 to March 9, 2009, the S&P 500 fell more than 50 percent. But in the spring of 2019, after ten years on the stock market, the latter part of this terrible decline returned. Hundreds of funds have seen 10-year yields soar.
It’s important to understand that this is happening, because when signs of severe past losses disappear, it’s easy to overlook the risks that come with investing.
takeaways
While I know markets can hurt a lot from time to time, I remain fairly bullish on stocks — and the US economy — over the long term, but anticipate trauma more often than anyone would like.
For short-term financing needs — meaning the next year or two — I think the risks of stocks are far too high for consolation, and I’m currently minimizing my holdings in long-dated bonds as well. Short-dated bonds, and cash in particular, are better suited to shorter investment horizons.
Fortunately, money market funds are doing extremely well. They seem like a good choice for the next six months or so.
On Wednesday, the SEC passed a series of complex measures to improve funds’ stability in a potential crisis. We’ll have to see how that plays out.
For now, I’m happy that my fund returns are looking much better now than they were three months ago, but I’m not confident that will be the case next quarter or even next month.
It’s not because I know where the markets are going. I don’t But I know they fall frequently. And I know for a fact that a year ago, in July 2022, the S&P 500 was up 9.1 percent.
That was good news at the time. But it also means there’s a good chance my 12-month stock market return will fall this month. That’s because a 9.1 percent gain is a high hurdle and the market is unlikely to clear it in any given month.
But buffered by bonds and money market funds, I will still invest in the stock market.