(PUB) Investing 2016

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quarter. Yes, low inflation has helped, but workers, and not just those at the top, have regained some buying and bargaining power. Earnings reporting season is a little more than half over, and nearly three- quarters of companies in the S&P 500 earned more than expected in July, August and September. At this pace, we’ll see the first year-over-year increase in earnings since the first quarter of 2015. Add that all together, and in spite of the election and pending Fed action, Jeff and I may be on the cusp of upgrad- ing our outlook from “slow growth, not no growth” to “moderate growth, not slow growth.” Malvern Odds and Ends Jeff and I got the answer on why those September distributions on Short- Term Investment-Grade and some of the other Vanguard funds, particularly those with short maturities, dropped so precipitously. This is a bit complicated, but in essence, the formula that is used to calculate what a bond fund pays out each month is not simply based on the inter- est it takes in each month. The month’s earned interest is annualized, divided by 365 and then accrued daily into the fund for eventual payout at month’s end. Because the TIPS in the funds’ portfolio had a severe cut to their distributions and because those distributions made up a disproportionate part of September’s income, annualizing the much smaller income stream yielded a much small- er month-end distribution. Got that? It makes sense, but it took several backs- and-forths with Vanguard to get a rea- sonable answer. In October, Short-Term Investment-Grade’s distribution bounced back closer to where it was before.

Speaking of distributions, year- end is approaching rapidly, and while Vanguard won’t be providing estimates of potential capital gains distributions until November 10, we can get a sense of which funds are poised to make payouts by looking at realized capi- tal gains through September. Among stock funds, those with realized gains of 3% or more of quarter-end NAV are Alternative Strategies , Capital Opportunity , Diversified Equity , Explorer , Growth & Income , Health Care , Morgan Growth , PRIMECAP , PRIMECAP Core , Selected Value and Windsor II . Income funds with realized gains of 1% or more include Intermediate-Term Treasury , Long- Term Investment-Grade and Long- Term Treasury . And while most ETFs will probably avoid paying out capital gains, Extended-Duration Treasury ETF does have realized gains of about 1.9% of quarter-end NAV. Remember that these figures can and do change between initial estimates and final payouts. But this should give you a good sense of where the biggest capi- tal gains could be coming from. For those following the October Hot Hands strategy, the October Hot Hands fund, which you’d buy now and hold until the end of October 2017, is High-Dividend Yield Index . Last year’s October Hot Hands fund, U.S. Growth , underperformed, gain- ing just 0.1% over the past 12 months versus 4.4% and 4.1% returns for 500 Index and Total Stock Market Index respectively. Hopefully you followed my recommendation to stick with a PRIMECAP-run fund instead of U.S. Growth as PRIMECAP gained 4.7%, and PRIMECAP Odyssey >

three-year returns fall from double-dig- it territory include Strategic Equity , which slipped from 10.2% to 7.5% and Dividend Growth , which dipped from 10.1% to 7.6%. What happened? Blame it on the math, as some strong months in 2013 rolled off the three-year calculation and recent weaker months rolled on. I don’t want to make too big a deal about this because, frankly, you know that my focus has always been on “rolling returns,” using multiple return periods to get a true sense of long- term performance, rather than “point-in- time” returns. That said, the three-year number car- ries weight with rating agencies and the press, which often uses it as a criteria for ranking funds, setting the three- year return up as a de-facto benchmark. I believe some investors may see the return to single digits as a canary in the coal mine, signaling a negative turn in the markets. I don’t see it that way—the economy remains strong, as do con- sumer balance sheets. The first estimate for third quarter GDP growth came in at 2.9%, the fastest pace in two years and a significant improvement over the 1.1% pace the economy grew at during the first half of the year. Even if the Fed hikes the fed funds rate in December, which I think they’ll do, interest rates will remain extremely “accommodative,” which means low to any consumer or corporation looking to borrow money. “Easy” money is a lubricant for economic growth. And don’t look now, but, even after taking inflation into account, the medi- an income of the full-time American worker hit an all-time high in the third

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