Safe Harbor Surprise
Welcome to October! Well, it's election year and October is always full of surprises! We have seen our fair share of them, and I expect to see more over the next 36 days. As you all know, Mr. Market hates surprises. The 50bps Federal Reserve rate cut was a surprise and any election surprises will also have a tendency to affect the market.
So this month we saw a wide variety of returns across the different mutual funds. The Fidelity OTC fund took a massive hit with a loss of over 8% while the other comparable funds on Vanguard and USAA produced modest returns. The bond funds saw a very low but positive return, which is what I expected to see and earn.
Unfortunately, we also saw a bit of a sell off the first day of the month, so when my trades activated, they experienced a loss. This is an evil we cannot control in mutual funds.
A couple of factors are continuing to drive my decision to remain in the Bonds this month. As mentioned above, this election year, like most in the last 30 years, will probably have an October surprise of some sort. It may be nothing, or it could be significant. The way the last 4 years have gone, and especially this year, I would not be surprised to see an event of some magnitude. If I'm wrong, I might be leaving some money on the table, but the risk, which is entirely impossible to quantify based on technical factors / analysis, is too great for me to do anything else.
Second, and the more logical of the factors influencing my decision is the state, or rather the perceived state, of the economy. We have had a couple of surprises in the last few months regarding the health of our economy and the world economy. First, it was the surprise revision of jobs, second, the U.S. Manufacturing PMI fell more than expected, and third, China's massive economic stimulus to revitalize their crumbling economy. Of course the biggest surprise came from the 50bps rate cut. I think everyone was expecting a tame 25bps rate cut, which would signal, inflation is under control, the economy is in a good spot, and “we're just trying to get back to normal.” Instead the 50bps cut signaled, “we see something on the horizon you don't see, and we need to take more dramatic action now before it's too late.” This was a surprise, and the markets reacted accordingly.
You will see the efficient frontiers for all the funds below. For Vanguard and USAA they point to the S&P500 funds, but for Fidelity, it points squarely to the international fund. A split this great is somewhat unusual and shows the market is confused as well.
So for October, I'm not going to answer my door and welcome any surprises. I'm going to stay in the Bond funds. Keep investing!
