Stock Markets Moving on Mixed Data

WOT Blog Graphic Template 10.8.2019.png

The Week in Review

  • Economic Signals Mixed at Home

  • European Recession May Be Underway, or Not

  • Stock Option Basics You Need to Know

  • Looking Ahead to Inflation and Consumer Sentiment

Worries about a slowing U.S. economy spooked traders during October’s opening days and stocks declined. But Friday’s employment report changed the mood and stocks bounded higher on news that the U.S. unemployment rate hit a 50-year low of 3.5% as 136,000 new jobs were added in September—the Dow Jones Industrial Average and S&P 500 index were both up more than 1% today as we went to print.

For the year through Thursday, the Dow and the broader S&P 500 have returned 14.4% and 17.9%, respectively. The MSCI EAFE index, a measure of developed international stock markets, is up 10.3%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has declined to 2.13% from 3.28% at 2018’s end. On a total return basis, the U.S. bond market has gained 9.2% for the year.

Economic Signals Mixed at Home

While the media has been rife with commentary about this having been the stock market’s “worst start” to a quarter in nearly a decade, we’re not panicking over a couple of lousy trading days. Rather, we are more concerned about whether there were good reasons for the selling earlier this week.

We certainly can’t say there’s no rationale for caution. Several recent economic reports were weaker than expected. Manufacturing data shows a continuing slowdown in activity, with this week’s U.S. manufacturing activity index falling to 47.8—the lowest reading since the Great Recession.

The sister report on the service (and much, much larger) side of our economy released Thursday was also disappointing. The ISM service sector index fell from August’s 56.4 read to 52.6. In English: The service economy is still expanding but at a slower rate than expected.

Contrast that with additional data suggesting we’re far from troubled. Along with this morning’s positive jobs numbers, a measure of the likelihood of recession over the coming six months was just updated and it remains exceedingly low. Plus, taken in its entirety all the factors that combine in the Leading Economic Index measure also suggest growth, albeit slower growth than we’d prefer.

We investors are just going to have to bear with the static surrounding the signals suggestive of everything from expansion to recession to stasis.

We’re going to have to wait for the arrival of third-quarter corporate earnings reports in a few weeks’ time to decode the true state of growth from these mixed signals. Until then, we investors are just going to have to bear with the static surrounding the signals suggestive of everything from expansion to recession to stasis.

European Recession May Be Underway, or Not

We have been saying for some time that we think a recession is likely in Europe’s moribund economy—and it seems to be coming true.

A report from Germany’s five leading economic-research institutes forecasts slower and lower European economic growth, with a 2019 forecast downgraded from 0.8% to 0.5% growth. The economists also cut their view for 2020 growth from 1.8% to 1.1%. Those aren’t recessionary numbers, but they are darned close. We’ll see if our prescience is correct or just in the ballpark.

German manufacturing is already deep into a downturn, with new numbers released this week the worst since the credit crisis of a decade ago. Germany’s economy relies heavily on exports, and Europe’s economy relies heavily on Germany. If German exports aren’t able to rebound, it will be hard for the rest of the continent to avoid a similar downturn.

The U.S. economy is better positioned to withstand being dragged into a recession by the rest of the world—but there’s no guarantee we’ll sidestep an economic downturn. We are keeping a careful eye on your (and our) portfolios and watching for opportunities to enhance our defenses without giving up gains.

* * * * *

Stock Option Basics You Need to Know

Long-associated with Silicon Valley startups, nowadays stock options are becoming a common part of many compensation plans as a means of enhancing benefits and retaining important employees. They offer the potential to participate in the growth of your company, but they often come with complications as well.

This week, we’ll clarify some common terminology and answer some questions you may have if you’ve received options as part of your compensation package or are considering asking for options at your next review or job change.

What are stock options? They are contracts that allow the holder to buy a stock at a pre-determined price, within a certain time frame.

In the case of options granted as part of a compensation package, that time frame is usually tied to the length of an individual’s employment with the company. Often, you must wait several years before being able to use (or “exercise”) any options you have been granted (the “vesting period”). Options also come with an expiration date; usually 10 years from the date they were granted.

What kinds of stock options are there? Broadly, there are two types of stock options, nonqualified stock options (NSOs) and incentive stock options (ISOs). The main difference? Taxes. NSOs are taxed twice—as ordinary income when they are exercised and at a capital-gains rate when they are sold. With ISOs, you’re only subject to the lower capital-gains rate, if certain conditions are met. For each, there are no tax implications when they are issued.

What does it mean to exercise my options? “Exercising the option” simply means purchasing shares of the stock at the price specified in the contract (the “exercise price”). There are several ways to do this. You may choose to pay for the shares in cash, take out a loan to pay the cost, swap existing shares, or use some of the exercised stock itself to cover the cost of the purchase (a “cashless” exercise).

Depending on how and when you exercise your options, you may owe taxes on the transaction right away—even if you plan to hold on to the stock. We recommend working with an accountant to understand the implications if you are receiving stock options and plan to exercise them.

* * * * *

Looking Ahead to Inflation and Consumer Sentiment

Next week is light on data, meaning headlines and noise may weigh heavy on markets. We will get reports on consumer credit, Federal Open Market Committee (FOMC) minutes, job openings, inflation and consumer sentiment.

If you’d like to learn more about our tactical or fundamental investment strategies, please contact Steve Johnson at 844-587-7393 or info@bravercapital.com.

Please note: This update was prepared on Friday, October 4, 2019, prior to the market’s close.

This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

Past performance is not an indication of future returns. We do not provide legal or tax advice, nor sell insurance products. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Always consult an attorney, tax professional or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.

Companies mentioned in this article are not necessarily held in client portfolios and our references to them should not be viewed as a recommendation to buy, sell or hold any of them.

© 2019 Braver Capital Management, an Adviser Investments, LLC company. All Rights Reserved.