It’s been a great half year for stocks, money market funds and, to a lesser extent, bonds — so good, compared to a year ago, that you might feel like celebrating when you look at your quarterly portfolio statement.
But this rosy picture does not reflect the full state of mutual funds and exchange-traded funds user by most US investors.
For one thing, while recent market returns are real enough, the reports are missing critical information that would make the returns seem less than impressive.
Quirks in the calendar and in government disclosure rules always make fund numbers look considerably better when periods of underperformance move too far past to be included in the quarterly reports required for publicly traded funds. It happened in the last quarter of the year, when the miserable results of 2022 were no longer fully represented in their stark atrocity.
On the other hand, bond yields, which were positive for the calendar year, were set recently. This is largely due to uncertainty about the state of the economy, inflation expectations and interest rate increases. Although inflation fell to an annual rate of 3 percent in the latest CPI report, the Federal Reserve is likely to raise interest rates again at its next meeting in June. July 25 and 26and may continue to do so in other meetings. Bonds can be affected.
Only money market funds – which are often overlooked as a form of “cash” and not included as one of the major asset groups – are in an unambiguously positive position. Returns on the 100 largest tracked money market funds Crane data The average is 4.94 percent, up from 0.6 percent just a year ago, and many funds pay more than 5 percent annually.
As the Fed raises the benchmark federal funds rate, money market fund rates follow. “I think they’re going to keep going higher for much longer,” Peter G. Crane, president of Crane Data in Westboro, Massachusetts, said in an interview. The good times for money market funds are far from over.
But for longer-term investors – those with prospects of more than a decade – stock and bond returns are more important than those of money market funds that are short-term in nature. And the latest stock and bond numbers don’t change the big picture at all. Over long periods, the stock market tends to outperform bonds and cash investments, but at the cost of much greater volatility.
Something strange has happened to stock and bond fund returns this year, though you might not notice unless you take the time to look under the hood, Daniel Weiner, president of Adviser Investments in Newton, Massachusetts, noted in an email.
He noted that the 12-month performance rates for a variety of funds had shifted from sharply negative in the first quarter of this year to sharply positive in the second quarter. This shift has had little to do with the recent performance of stocks and bonds.
Instead it was about what happened last year, and how dismal 2022 market scores in the 12-month performance results.
Weiner said “tremendous gains” are being reported for the second quarter, but they shouldn’t be taken at face value. He added, “All of this is in the time periods during which returns are measured.”
I recall that the first half of last year was very bad for many investors, especially the second quarter. Those four months were included in the 12-month returns that investors had in their fund statements in the spring, but they pulled out of the 12-month returns through June, which are the returns people are looking for now.
For example, file Standard & Poor’s 500 It was up 15.9 percent in the calendar year through June, which is a big six-month high, no doubt. In the twelve months through June, it rose 17.6 percent.
But keep in mind preparation That was right Just a month ago So far, most fund shareholders have not seen them because these figures do not comply with the quarterly reporting schedule imposed by the Securities and Exchange Commission.
The S&P 500 rose 8.9 percent in the calendar year through May, still a nice increase. But the amazing thing is this index’s gains over the 12 months through May It was only 1.2 percent.
The S&P 500’s 12-month yield jumped 16.4 percentage points in just one month. The higher return reported in June, a 17.6 percent increase over 12 months, is the common metric, prompting much more optimism 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 most significant change was the S&P 500’s 8.4 percent drop in June 2022. That 12-month loss was included in the 12-month return to May 2023, but was lowered in the more significant quarterly report in June 2023.
Using data provided by Morningstar, a financial research firm, I found that this pattern extends across funds of many types.
Stock and bond investors in mutual funds and ETFs had positive returns on average for the second quarter, which ended June 30, as well as the first quarter, which ended March 31.
However, the 12-month average returns for stocks and bonds have shifted drastically from quarter to quarter, mainly because of what happened in 2022, not this year.
Here are the numbers from the last quarter:
And here they are in the first quarter, just three months ago:
So what is the real picture here?
In simple terms, the stock and bond markets went up this year but fell last year. Most investors have lost money since the market peaked in January 2022. And over the longer periods required by the SEC to generate record returns for a fund — one year, three years, five years, 10 years, and since the fund’s inception — funds have been The broad stock is generally positive. Bond funds tend to be positive for longer periods — five and 10 years or longer — but negative over one and three years.
Strange things also happen for long-term returns. Even seemingly stable 10-year returns can change sharply from month to month, altering investors’ perceptions of market strength. It happened four years ago.
As I pointed out then, the S&P 500 fell more than 50 percent from September 7, 2007 through March 9, 2009. But in the spring of 2019, the last of that horrible downturn was off the stock market’s 10-year trailing returns. 10-year returns have skyrocketed for hundreds of funds.
It is important to understand that this happens because when evidence of severe losses recedes in the past, it is easy to overlook the risks involved in investing.
Even knowing that markets periodically cause significant pain, I remain somewhat bullish on stocks – and the US economy – over the long term, while anticipating shocks more frequently than anyone else might like.
So for short-term financial needs — those for the next year or two — I see equity risk as too high for comfort, and I’m cutting back on my long-term bonds at the moment as well. Short-term bonds, especially cash, are better for shorter horizons.
Fortunately, money market funds work great. Seems like a good bet for the next six months or so.
Wednesday, Supreme Education Council A series of complex measures to enhance the stability of funds in a possible future crisis. We’ll have to see how that happens.
Right now, I’m glad my money returns look a lot better now than they did three months ago, but I’m not confident that will be true next quarter or even next month.
This is not because I know where the markets are going. Me, no. But I know they fall off a lot. And I know for sure that one year ago, in July 2022, the S&P 500 rose 9.1 percent.
That was good news at the time. But it also means that there is a strong chance that the 12-month stock market return will decline This month. This is because achieving a gain of 9.1 percent is a huge hurdle and, in any given month, the market is not likely to overcome.
But with the support of bonds and money market funds, I would invest in the stock market anyway.