Vanguard's customer service issues have finally made the news — international news, that is.

Last week, the Wall Street Journal published an article about an issue we've covered since last year: Vanguard Group, our local mutual fund giant, is grappling with both a blessing and a curse.

The blessing: Taking in roughly $1 billion a day, more than any other investment firm on the planet. That's helped Vanguard drive its already-low fees lower for investors. The company's signature index funds, created by founder John Bogle, have won widespread acceptance.

The curse? Wait times on the phones for customers, website outages, mistakes in booking asset transfers and retirement account distributions, some of which resulted in tax bills; and last week, erroneous Vanguard emails "alerting" customers that they were out of cash when they  weren't.

A spokesperson for Vanguard told the Journal that "periodic systems issues" were unrelated to the firm's growth and that Vanguard was focused on better service to clients.

My colleague Joseph N. DiStefano's story in January 2017 asked whether Vanguard could keep up with its amazing surge in new business. And the Bogleheads, a group of Vanguard devotees who keep an eagle-eye watch on the firm, complained about the latest problem on their website, Bogleheads.org.

"It appears that clients that made trades are receiving emails notifying them that they do not have enough money in their settlement account to cover the trade," wrote one customer last week. "The clients are reporting that they do have enough money to cover the trade. The emails were generated in error. Vanguard is telling the clients in their email which was sent in error that they are going to sell something in the clients account to cover the trade if the client does not take action."

But Vanguard customers (I am one, as are many of my colleagues) are a forgiving lot.

Johan on the Bogleheads.org forum replied: "I'm glad [the customer service issue] is getting a bit of attention, because I've found my cost basis issue to be pretty annoying. I can't transact on my holdings in my taxable account because the cost basis is wrong. I can't make my scheduled investments, I can't tax loss harvest, I can't donate appreciated shares. I'm going to be locked out for a whole month. That's a pretty big deal. That said, I do think Vanguard has terrific funds and they've been fine for me in the past. I just put $120K into VG's municipal money market yesterday, it's not like I'm going to stop doing business with them. But I am going to move my ETFs in taxable over to Fidelity … I know software is hard, but a brokerage really has to get this stuff right. Hopefully these really are related to growth and they'll have them ironed out soon."

So what's new about this? The Journal is finally noticing. Hopefully, Vanguard invests in upgrading legacy technology for the benefit of customers, who've entrusted Vanguard with just over $5 trillion in assets.

Mid-Term meh?

Stocks underperform during midterm election years, market data show, and that may be the case again in 2018.

From 1950 to 2014, the stock market has underperformed, and has historically experienced much higher levels of volatility during the first nine months of a midterm election year. Since 1950, the first nine months of the average midterm election year have tended to be mediocre for stock market returns, according to Chart of the Day. That sub-par performance was then followed by a significant year-end rally after the election.

The theory? Investors abhor uncertainty and tend to sell stocks in the months leading up to an election when the outcome is unknown. Beginning in early October, however, once the outcome of the election becomes increasingly apparent, investors respond by getting back into stocks.

Stocks tend to trade in a more volatile pattern in the months leading up to U.S. midterm elections (Credit: Chart of the Day).
Chart of the Day
Stocks tend to trade in a more volatile pattern in the months leading up to U.S. midterm elections (Credit: Chart of the Day).

So for retail investors, expect more volatility for the rest of 2018, says DNB First's John Stoddart, chief investment officer and senior portfolio manager of wealth management. Professional investors look to the VIX, or volatility index, as a proxy for big moves up and down and as a measure of market uncertainty.

"We see the VIX moving higher this year, and our reasons are again a higher interest rate environment. That puts added pressure on the market, and as we've seen in previous cycles. there's higher volatility in midterm election years," Stoddart said.

Volatility hit an all-time low late last year of just above 9.0 – historically the VIX has traded in the low teens – and "one reason was we had an environment where stocks just rose and rose, and the VIX stayed low. But U.S. GDP has not consistently been growing on a percentage basis, so we think that investors will see higher volatility this year, perhaps in the high teens and low 20s level over the next 24 to 36 months," he said. Still, DNB First, which oversees $250 million in wealth management assets, estimates stock market returns of between 3 percent and 7 percent this year.

And volatility isn't just reserved for the stock market, Stoddart said.

"We see more volatility in the bond market as well. We're staying away from very short-term bonds and the longer-term bonds," which can be more interest-rate sensitive. He sees the Fed raising short-term interest rates two or three times in 2018, with 0.25 percent hikes each time, "depending on what the Fed sees in the overall economy. We don't see a total of four rate hikes, unless we see really strong GDP numbers over the next few quarters."