Hello, YieldAlley readers! In this issue:

• Vanguard's 38/62 Portfolio, Pass or Pivot?

• U.S. Stocks Hit Fresh Highs as Bank Profits Jump and Core Inflation Eases

• Personalized United Airlines miles promotion

• And more!

NEWS

Standout Stories

🤳 Supreme Court Backs Law Requiring TikTok to Be Sold or Banned (NYT)

📄 About a quarter of U.S. teens have used ChatGPT for schoolwork (Pew Research)

🍜 Japan posted record-breaking tourist figures in 2024 (Sherwood)

📈 Who’s Afraid of Rising Treasury Yields? Not Stocks (VettaFi)

💰 Active Funds and the Index Concentration Argument (Morningstar)

MARKET THOUGHTS

U.S. Stocks Hit Fresh Highs as Bank Profits Jump and Core Inflation Eases

• ECONOMY

  • Core inflation's rise of 0.2% in December marked the smallest monthly gain since July, with the annual rate cooling to 3.2% from 3.3%, supporting the Fed's disinflation narrative. Consumer spending showed resilience but moderated, with retail sales rising 0.4% versus an expected 0.6%, while the labor market displayed early softening signs as weekly jobless claims climbed to 217,000. The mix suggests a gradual economic cooling that keeps rate cuts in play for 2025.

• STOCKS

  • Bank earnings ignited a broad market rally, with value stocks outpacing growth by the widest margin since September. JPMorgan, Goldman Sachs, Citigroup, and Wells Fargo all surged on strong Q4 profits, while energy stocks gained on higher oil prices. The inflation-driven relief rally pushed major indexes to their best one-day gains since November's post-election surge, echoing investor optimism for rate cuts despite near-certain Fed hold in January.

• FIXED INCOME

  • Treasury yields retreated following the favorable inflation print, spurring gains across fixed income markets. Municipal bonds recovered early-week losses despite elevated new issuance, while corporate bonds saw strong demand with above-average trading volumes. High-yield sentiment strengthened as investors sought higher yields amid growing confidence in the Fed's policy path.

INCOME BUILDING

Vanguard's 38/62 Portfolio, Pass or Pivot?

At the beginning of the year, we challenged the conventional wisdom that young investors should maintain minimal bond exposure. Our analysis of two centuries of market data revealed that bonds often matched or outperformed stocks from 1793 to 1903. More tellingly, following the 1999 market peak, the S&P 500 needed 18 years - until 2017 - to finally surpass the Total Bond Index in total returns. Now, as we enter 2025, Vanguard’s latest market outlook suggests we may be at another such inflection point.

The investment giant’s December 2024 outlook presents a stark assessment of current market conditions. U.S. equity valuations have reached the 99th percentile relative to fair value based on cyclically adjusted price/earnings ratios. Meanwhile, bonds have become increasingly attractive, with Vanguard projecting 4.3%-5.3% annualized returns for U.S. and global fixed income over the next decade. This environment has led Vanguard to advocate for a conservative 38/62 equity-to-fixed income split, challenging decades of traditional allocation models.

However, before investors rush to reshape their portfolios, we need to examine a crucial yet often overlooked factor: the absolute size of your portfolio relative to your spending needs. This “size factor” fundamentally changes the risk equation. A retiree with $5 million who needs only $100,000 annually can afford to take more risk than someone with $1 million requiring $40,000.

The size factor becomes particularly critical during market drawdowns. Consider a portfolio requiring a 4% withdrawal rate versus one drawing 2%. During significant market declines, these withdrawal rates can become unsustainable. If your portfolio drops 50% in value while you’re withdrawing 4% annually, that withdrawal rate effectively doubles to 8% - a level few portfolios can sustain long-term.

Investors should, therefore, focus not just on their final target but on the cushion they want above their basic needs. A portfolio twice the size needed for basic expenses provides flexibility that fundamentally changes risk capacity. This might mean maintaining equity exposure through market downturns, capitalizing on distressed assets, or simply sleeping better at night knowing basic needs are more than covered.

The bond landscape adds another compelling dimension to this discussion. Vanguard projects an 81% probability of positive returns for the Bloomberg U.S. Aggregate Index over the next year, thanks to what they term the “coupon wall” - higher starting yields providing meaningful downside protection. Corporate bonds have been particularly attractive entering 2025, with major financial institutions issuing bonds yielding over 6%, even with strong credit ratings. While these often include call features, they represent a significant opportunity for income-focused investors who understand the risks.

Looking ahead, several key factors will shape portfolio performance in 2025. Vanguard expects core inflation to remain above 2.5%, with the Federal Reserve likely maintaining rates at or above 4%. Combined with projected real GDP growth of 2.1%, this environment suggests continued market volatility.

While Vanguard’s 38/62 recommendation provides a useful reference point, optimal portfolio construction remains highly individual. Those with larger portfolios relative to their spending needs might justifiably maintain higher equity exposure despite Vanguard’s conservative outlook. The key insight is that risk capacity stems not only from age but from the relationship between portfolio size and withdrawal requirements.

Conversely, investors closer to their minimum required portfolio size should carefully consider Vanguard's warning about U.S. equity valuations. Their analysis essentially suggests bonds will outperform stocks over the next decade. The possibility that current market dynamics mirror 1999 more than a sustainable productivity boom warrants caution, particularly for those who cannot afford significant drawdowns.

INCOME BUILDING

Cash Rates

Government Money Market Funds (7-Day Yields)

• SNVXX (Schwab Government Money Fund - Investor Shares): 4.07%

• SPAXX (Fidelity Government Money Market Fund): 4.01%

• TTTXX (BlackRock Liquidity Funds: Treasury Trust - Institutional Class): 4.23%

• VMFXX (Federal Money Market Fund): 4.27%

Brokered CD Rates (6-Month Rate)

• Charles Schwab: 4.24%

• E*Trade: 4.20%

• Fidelity: 4.20%

• Merrill Edge and Merrill Lynch: —

• Vanguard: 4.20%

ETFs (30-Day Yields)

• SGOV (iShares 0-3 Month Treasury Bond ETF): 4.33%

• BIL (SPDR Bloomberg 1-3 Month T-Bill ETF): 4.28%

• USFR (WisdomTree Floating Rate Treasury Fund): 4.28%

• TFLO (iShares Treasury Floating Rate Bond ETF): 4.27%

BONUSES

Brokerage, Bank and Credit Card Bonuses

United Airlines has launched another iteration of its Mile Play promotion, running through March 17, 2025. The structure offers personalized bonus miles opportunities based on completing specific flight requirements - a format that’s seen regular refreshes throughout 2024.

The promotion follows United's established pattern of refreshing these offers approximately every 2-3 months, with previous rounds ending in December 2023, September 2023, and June 2023.

To participate, members need to check their personalized offers through United's direct link, as bonus requirements vary by individual. For those interested in maximizing their United miles earning, this promotion represents another opportunity to boost their balance through strategic flight planning.

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