What’s on Tap: Managing Risks and Finding Investing Opportunities

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  • Businesses Confident, Consumers Spending as Holiday Shopping Begins

  • Fed Head Bullish on U.S. Growth: Additional Interest Rate Hike Likely

  • Our Perspective on Stock Market Volatility and Declines 

  • Looking Ahead to Housing Data and Other Economic Indicators

We see the same loud headlines you do—yet we believe that handwringing and caterwauling is most suited to the media business, not the business of investing.

We are cognizant of the litany of fears—escalating tensions in oil-rich countries, Brexit negotiations, incipient inflation and a potentially over-aggressive Federal Reserve, divisive domestic politics, a trade war with China and more. Any one of these issues could throw the markets into reverse should their current trajectory take a factual turn for the worse.

But consider this: The unemployment rate is as low as it has been in nearly four decades. Interest rates are low by any historical measure. Earnings and the economy are both still growing. With a holiday shopping season around this month’s corner, we think American consumers, who are already spending mightily, are likely to propel additional expansion.

We believe that it’s a fool’s errand to bet against a strong U.S. consumer just as much as it would be foolhardy to throw investment caution to the wind. We are always focused on both managing risks and finding opportunities when they present themselves.

For the year through Thursday, the Dow Jones Industrial Average has returned 4.4%, while the broader S&P 500 has gained 3.9%. The MSCI EAFE index, a measure of developed international stock markets, is down 9.6%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has climbed to 3.60% from 2.71% at 2017’s end. On a total return basis, the U.S. bond market has declined 2.2% for the year.

Businesses Confident, Consumers Spending as Holiday Shopping Begins

Confidence measures continue to reflect an upbeat mood among small-business owners. The latest report (based on October data) shows that confidence remains near record highs. Business owners, like U.S. consumers, are not buying what pessimists are selling even as they face ongoing growth-related concerns: A tight labor supply (particularly of skilled workers) and the subsequent impact of rising wages on company bottom lines.

Meantime, consumers are spending their higher incomes. Retail sales shot up 0.8% in October, the best showing in five months and a healthy recovery from September’s hurricane-impacted decline. The numbers also demonstrate how hard it is to keep a determined consumer down—even ahead of a nerve-wracking midterm election.

Heading into the holiday shopping season, momentum is pointing to a very merry fourth quarter for businesses large and small. Adding to the potential for greater holiday spending is the dramatically lower price of oil, down 25% or so in the last six weeks. Lower prices at the pump mean more cash in consumers’ wallets.

Fed Chair Bullish on U.S. Growth: Additional Interest Rate Hike Likely

As you’d expect, Fed Chair Jay Powell is keeping close watch over a slowdown in global growth that could challenge continued U.S. expansion. But, in a speech given earlier this week, he said he believes that growth remains solid and (maybe not surprisingly) that the central bank’s policy was one reason why “our economy is in such a good place right now.” We believe Powell & Co. will hike the fed funds rate an additional 0.25% at the conclusion of their December 19 meeting, undeterred by short-term stock market declines or criticism from the West Wing. As we’ve said before, rate hikes are a sign of policymakers’ confidence in the economy’s ability to sustain growth.

Our Perspective on Stock Market Volatility and Declines

Over the past six weeks since major U.S. stock market indexes hit all-time highs, stocks have sagged under the weight of geopolitical uncertainty. We believe some context and perspective is appropriate (and hopefully reassuring).

In late October, the stock market fell on five out of six days, with the Dow down a combined 1001 points over the period. For the month as a whole, the Dow fell more than 1300 points—the third-worst monthly point-drop in the Dow’s history. In November, we’ve already seen the Dow fall 1100 points in the four days before yesterday’s rebound. It can be nerve-wracking to see those successive declines, but as of yesterday’s close, the Dow is actually up 173 points for the month. 

This brief history is important because, over the many years we’ve been in the wealth management business, we’ve noticed that investors tend to think in terms of percentages on the way up, but in dollars (or index points) on the way down—as we just did (to make the point). So let’s reconsider where the stock market is today on a percentage basis. The Dow Jones Industrial Average, including dividends, closed on Thursday just 5.4% below its all-time high. The S&P 500? Just 6.6% under its high-water mark.

Those dips are absolutely normal and remain well below average for a decline from a high. In the average calendar year, stock market investors can expect to take a 14% haircut from an intra-year high at some point. Today’s markets aren’t even 10% below 2018’s record levels.

Taking a broader view, consider what stocks have done since the market bottomed on March 9, 2009. On a total return basis, the S&P 500 is up nearly five-fold (394.5%). Unless we’re severely mistaken, your portfolio is larger today than it was a decade ago. Having a bigger portfolio also means that small percentage declines (and similar gains) translate into bigger dollar values. We understand that, for many of you, those larger dollar amounts can be unsettling when they are in the minus column. Looking at it through the percentage lens however, the recent stock market volatility has been business as usual.

Looking Ahead to Housing Data and Other Economic Indicators

Next week, we’ll be poring over home-related data, including builders’ confidence, new residential construction and building permits, and existing home sales. We’ll also get reads on durable goods, leading economic indicators, consumer sentiment and manufacturing.

Please note that the Braver Capital offices will be following the New York Stock Exchange’s hours around the Thanksgiving holiday, which means we will be closed on Thursday, November 22 and closing at 1 p.m. on Friday, November 23. We hope you have a very happy and healthy Thanksgiving!

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

Please note: This update was prepared on Friday, November 16, 2018, prior to the market’s close.

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. 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. The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. We do not provide legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation. 

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

© 2018 Braver Capital Management, an Adviser Investments, LLC company. All Rights Reserved.