Monthly Strategy Review Braver Capital: December 2018 Update

  • Market Analysis: S&P 500 Down 4%, Energy Stocks Drop 18% in 2018

  • Investment Strategy Review: Tactical Portfolio Adjustments


    Market Analysis: S&P 500 Down 4%, Energy Stocks Drop 18% in 2018

    The litany of concerns weighing on investors’ minds throughout 2018 came to a head in December with the U.S.-China trade war, Federal Reserve rate hikes and decelerating global growth at the forefront. The S&P 500 index declined 9.0% in December to end the year down 4.4%.Selling was so unremitting that even those defensive sectors that had outperformed during the previous two months gave back gains over the year’s final weeks. The health care sector—a group that benefited from being less susceptible to cyclical trends during the year—was beset by negative sentiment after a federal judge struck down the Affordable Care Act mid-December. Health care stocks shed 8.6% for the month, just barely beating the broad index, but ended the year as the top-performing sector with a 6.5% gain in 2019.

    The utilities sector maintained a defensive edge, falling only 4.0% in the final month to finish with a 6.5% gain on the year, the second-best return among U.S. sectors. Consumer discretionary and technology stocks, market pace cars earlier in the year, gave back more than 8.0% each in December to end the year roughly where they started. Tumbling oil prices dragged energy stocks down 12.7% over the month, springing the year’s worst leak with an 18.1% decline.

    Foreign developed stock markets fared no better than those in the U.S. Geopolitical concerns involving trade, Brexit and Italian politics helped send the MSCI EAFE Index down 4.8% in December as the broad benchmark hobbled to a -13.8% return for the year. Negative sentiment around China’s economic slowdown pulled that country’s index down 6.0% during the month. Despite this, the broad MSCI Emerging Markets Index held up relatively well, falling only 2.8% in December while delivering a dismal -14.6% return for 2018.

    The bond market reflected December’s risk-off theme. Demand for safety boosted prices on U.S. Treasury bonds, and the Bloomberg Barclays U.S. Treasury Index rose 2.2% in December. The index’s strong fourth quarter made up for earlier 2018 losses—the index closed the year with a 0.9% gain.

    On the opposite end of the risk spectrum, U.S. high-yield corporate bonds waned as negative sentiment dogged the sector. The Bloomberg Barclays U.S. Corporate High Yield Index, which was flat going into December, finished down 2.1% for the month and year. The Bloomberg Barclays U.S. Aggregate Bond Index (a measure of high-quality U.S. bonds that includes Treasury and corporate issues) fared better, returning 1.8% during the month to finish flat for 2018.

    Investment Strategy Review: Tactical Portfolio Adjustments

    In December, the managers of our Dividend Income portfolio added to an existing position in the country’s leading commercial jet manufacturer after weakness in the stock arose over tariff concerns and a dispute with one of its customers. The current dividend yield on the portfolio is approximately 2.7% compared to 2.2% for the portfolio’s S&P 500 benchmark. The portfolio remains overweight to companies in the technology, financials, industrials and consumer staples sectors.

    Our Global Tactical Balanced strategy began the year by making several trades to reduce risk in the portfolio. Positions in an S&P 500-tracking ETF, New Zealand stocks and the U.S. consumer discretionary sector were replaced by investments in various fixed-income sectors, including preferred stocks, high-yield bonds and investment-grade bonds. The portfolio’s stock allocation now stands at 10%. Global Tactical Balanced also has an allocation to mortgage and equity REITs.

    Overall market weakness finds the Tactical Balanced investment strategy with a 25% allocation to the stocks in the S&P 500 and an equal weighting in the broad bond market, with the remaining 50% of the portfolio in cash.

    Our Tactical High Income portfolio traded into high-yield bond funds and ETFs in early December. Our strategy is designed to be invested for at least 30 days after buying, so we held our high-yield-bond positions through December despite weakness in the market. We continue to hold them as the sector has rebounded; we also constantly monitor the portfolio in light of recent volatility.

    Tactical Opportunity’s quantitative models triggered several trades in December, significantly reducing risk. The portfolio added a 20% weighting in a long-maturity Treasury bond ETF. It added small positions in real estate and utilities while raising cash to 60% of the portfolio as consumer discretionary, financials and small-cap holdings were sold.


    The stock market’s broad selloff in December did not have much of an impact on Tactical Sector Rotation’s underlying sector rankings—as a result, there were no changes to the portfolio at the start of January. While our other tactical strategies have the potential to reduce risk by trading to cash or bonds, Tactical Sector Rotation is always invested in the eight stock sectors exhibiting the strongest relative performance. The portfolio currently includes defensive sectors, such as consumer discretionary and health care, along with holdings in consumer staples, financials, pharmaceuticals, real estate, telecommunications and utilities.

All Braver strategies carry a risk of loss. Markets can gain or lose value in dramatic fashion over the span of a single day, month or more. Braver strategies—nor the models that guide the strategies—cannot guarantee the avoidance of market losses, or that the strategies will participate in all market recoveries or gains. Yield figures provided on certain portfolios do not represent portfolio performance, and therefore should not be interpreted as such or used to estimate or infer portfolio performance.

 This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations or personal investment advice, or considered an offer to buy or sell specific securities. References to current sector positioning are for informational purposes only and are not to be construed as statements of the current, past or future profitably of the particular positioning. Data and statistics contained herein are obtained from what we believe to be reliable sources; however, their accuracy, completeness, or reliability cannot be guaranteed.

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