It’s been a great six months for equities, money market funds and, to a lesser extent, bonds. It performed so well compared to last year, and when you look at the quarterly portfolio report, you might want to celebrate.
But this rosy picture doesn’t capture the whole picture for mutual funds and exchange-traded funds. Already used by most American investors.
First, although recent market returns have been realistic enough, the report lacks key information that dilutes the impressive returns.
Due to the peculiarities of calendars and government disclosure rules, when periods of poor performance go too far in the past to be included in the quarterly reports required of listed funds, the fund’s numbers always look pretty good. . That’s what happened in the quarter when 2022’s dismal returns were completely overshadowed by its sheer atrocity.
Second, bond returns, which have been positive in calendar years, have been sluggish in recent years. The main reason for this is the uncertainty about the economic situation and the outlook for inflation and rising interest rates. The latest consumer price index report has pushed inflation down to 3% a year, but the Federal Reserve is likely to raise rates at its next meeting. July 25th and 26th, you can continue it in future meetings. Bonds could take a hit.
Only money market funds (often disregarded as a form of ‘cash’ and not included as one of the major asset groups) have a clear advantage.100 Big Money Market Fund Yields Tracked By crane data The average is 4.94%, up from 0.6% just a year ago, with many funds paying 5% or more annually.
When the Fed raises its benchmark federal funds rate, money market fund rates will follow suit. “It’s going to keep going up for a while,” Peter G. Crane, president of Crane Data of Westborough, Massachusetts, said in an interview. The good times are far from over for money market funds.
However, for long-term investors (those with a horizon of 10 years or more) stock and bond returns are inherently more important than short-term money market funds. And looking at the latest stock and bond numbers doesn’t change the whole picture at all. Equity markets tend to outperform bond and cash investments over the long term, but at the cost of greater volatility.
flashy returns
As Daniel Wiener, chairman of Advisor Investments in Newton, Massachusetts, pointed out in an email, something strange happened to stock and bond fund returns this year, but you might not realize it until you take the time to look under the hood. unknown.
He said the aggregated performance of various funds over the past 12 months turned from big negatives in the first quarter to big positives in the second quarter. This shift had little to do with recent stock and bond performance.
it was more about what happened last Learn how the disastrous markets of 2022 are documented in 12-month performance results.
Wiener said the reported “significant profit” in the second quarter should not be taken at face value. “It’s all about the time period when the returns are measured,” he added.
Remember, the first half of last year, especially the second quarter, was traumatically bad for many investors. Those four months were included in the 12-month returns investors received in their fund reports in the spring, but they’re not included in the 12-month returns through June that people are currently looking at.
for example, S&P500 There is no doubt that it rose 15.9% in the calendar year ending in June, the biggest increase in six months. In the 12 months to June, it rose a staggering 17.6%.
But let’s think totalling it was right just a month ago However, most fund shareholders never saw these figures because they did not correspond to the quarterly reporting schedule mandated by the Securities and Exchange Commission.
The S&P 500 Index rose 8.9% in the calendar year to May, still a respectable gain. What is surprising, however, is the rise in the index over the 12 months to May. Only 1.2 percent.
The S&P 500’s 12-month return is up 16.4 percentage points in just one month. And the higher return of 17.6% 12-month increase reported in June is a commonly seen indicator, and much more optimistic sentiment for the stock market than the meager 1.2% return. is causing
what happened? Two things.
The stock market rose 6.5% in June. But the more significant change was the 8.4% drop in the S&P 500 index in June 2022. This year’s monthly losses were included in the 12-month return ending May 2023, but were excluded in the much more significant June 2023 quarterly report.
the bigger picture
Using data provided by financial research firm Morningstar, we found this pattern spread across different types of funds.
Equity and bond investors in mutual funds and ETFs averaged positive returns not only in the first quarter ended March 31, but also in the second quarter ended June 30.
However, average 12-month returns for equities and bonds have varied significantly from quarter to quarter. This is mostly due to what happened to him in 2022 instead of this year.
Here are the latest quarterly numbers:
And here’s the first quarter data, just three months ago.
So what is the real picture here?
Simply put, the stock and bond markets rose this year but fell last year. Most investors have suffered losses since the market peaked in January 2022. Broad equity market funds are generally positive over the long term (1, 3, 5, 10 years, and from fund inception) that the SEC requires for standard fund returns. Bond funds tend to be positive in the longer term of 5 and 10+ years, but negative in 1 and 3 years.
Strange things happen with long-term returns too. Even his seemingly stable 10-year returns can change sharply from month to month, changing investors’ perceptions of market strength. That happened four years ago.
As I pointed out then, the S&P 500 plunged over 50% from Sept. 7, 2007 to Mar. 9, 2009. But in the spring of 2019, the last part of that horrific decline was wiped from his decade-long stock market. Return value. Hundreds of funds’ 10-year returns skyrocketed.
It’s important to understand that this is happening because when evidence of large losses becomes a thing of the past, the risks involved in investing can easily be overlooked.
Take-out
I remain fairly optimistic about stocks and the U.S. economy in the long term, even knowing that markets regularly cause a lot of pain, but I expect trauma to happen more often than anyone would like. doing.
Therefore, for my short-term funding needs over the next year or two, I believe equities are too risky to be comfortable, and I am currently minimizing my holdings in long-term bonds. Short-term bonds, especially cash, are good for short terms.
Fortunately, money market funds are performing great. Sounds like a good bet for the next six months or so.
on wednesday, SEC A complex series of measures have been adopted to increase the stability of the Fund against future potential crises. We’ll have to see how that goes.
So far I’m happy that my fund is doing much better than it was three months ago, but I’m not sure if that will be the case next quarter or even next month.
Not because I know where the market is going. I don’t But I know they fall often.And I learned a year ago in July 2022 that the S&P 500 Rose 9.1 percent.
That was good news at the time. But that also means my his 12-month stock market returns are likely to be lower. this month. A 9.1% rise is a high hurdle and the market is unlikely to exceed it in any given month.
But buffered by bonds and money market funds, I invest in the stock market anyway.
