What’s on Tap: Investors Remain Focused on Economic Fundamentals

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  • Short-Lived Bears No Match for Long-Lived Bulls—Dividends Matter

  • Mueller Report’s Market Impact Likely Inconsequential

  • Health Care Stocks Catch a Political Cold; Demograyphics™ Will Prevail

  • Looking Ahead to Earnings, Home Sales and Durable Goods

Major U.S. stock market indexes are hovering near record territory even though health care stocks, feeling the pinch of “Medicare for All” campaign rhetoric, have been a counterweight. (We have more to say on health care below.) Optimism about China’s economic growth and U.S. trade negotiations, first-quarter earnings reports and U.S. economic expansion is bolstering investor confidence. 

On the big issues, inflation is quiet, jobs are plentiful and incomes are starting to rise. For a consumer-driven economy, that’s about as good as the news can get. And while continued growth through June would mark the longest economic expansion in U.S. history, this doesn’t mean the good times must shortly come to an end. Expansions, like bull markets, don’t die of old age or on any predictable schedule. We think this one has a way to go, though we’re not making predictions of how far, or for how long.

For the year through Wednesday, the Dow Jones Industrial Average and the broader S&P 500 have returned 14.4% and 16.4%, respectively. The MSCI EAFE index, a measure of developed international stock markets, is up 13.3%. As of Wednesday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has dropped to 3.06% from 3.28% at 2018’s end. On a total return basis, the U.S. bond market has gained 2.4% for the year.

Short-Lived Bears No Match for Long-Lived Bulls—Dividends Matter

If you count dividends—and you should, because dividends matter—the bear market we endured during 2018’s fourth quarter ended last Friday. Vanguard’s 500 Index fund (a proxy for the S&P 500, which you can’t invest in directly) gained 24.4%, including dividends, over the 75 trading days from Christmas Eve through last week. That put it at an all-time high even if, on price alone, the fund is a hair’s breadth below its prior peak.

Source: Vanguard.

Source: Vanguard.

What do these new highs and a nearly 25% return over three-plus months tell us? For one thing, stock markets often recover from a steep bear market in the V-shaped pattern you see in the chart. Or put another way, it’s normal to see stocks rally strongly off of a bear-market bottom. Of course, we don’t know when that bottom is in place until well after the fact, which is another lesson in the futility of trying to time bottoms and peaks in the stock market.

By the way, unlike many on Wall Street, we do classify the fourth quarter as a bear market even if the 500 Index fund, for example, didn’t quite decline 20% from its high, the textbook definition of a “bear market.” (It was “only” down 19.6%.)

A new high for the market isn’t a cause for concern. As you’ve heard us say before, once stock markets hit a new high, there are only two directions they can go: Higher or lower. More often than not, new highs beget more new highs. We believe the economic and earnings trends in the U.S. make the year’s already strong gains defensible, though short-lived corrections are unavoidable.

Mueller Report’s Market Impact Likely Inconsequential

The road ahead has both known risks (like slowing global growth or the uncertainty of earnings growth rates in 2019) as well as potential event-driven risks. Our job and investment philosophy is to distinguish between those events that we think will have a short-term impact on the markets and those that could have enough lasting impact. Today’s release of the (redacted) Mueller report might rile the markets a bit. Despite the obvious fact that the report will serve as ongoing fodder for 2020 election campaigners, we think its effects on investors will be short-lived and inconsequential.

Health Care Stocks Catch a Political Cold; Demograyphics™ Will Prevail

Health care stocks have been notable outliers to the broader market’s remarkable early-2019 run. After another dip on Wednesday, the S&P 500 health care sector is down 6.5% in April and 0.4% year-to-date, significantly behind the broader S&P 500 index’s 16.4% calendar-year advance. While the sector could use a tissue and some chicken soup, this looks to us like a wealth-building opportunity.

Wall Street traders have been shedding health care stocks on what we believe is headline noise. Insurers and pharmaceutical companies have been sent to the ER on conjecture that ranges from overturning the Affordable Care Act to “Medicare for All” to various drug-pricing proposals, none of which are close to becoming legislative reality. 

At the same time, UnitedHealth Group, the nation’s largest health insurer, had its second-most profitable quarter ever during the first three months of 2019 and the firm raised profit expectations for the rest of 2019 in a Tuesday earnings call with investors. Despite this rosy outlook and its cash-rich coffers, the company’s stock fell again yesterday and is down 13.0% for the year through Wednesday’s close.

We already know that health care is always going to be a politicized topic. But our longstanding view over the past 25 years is that Demograyphics™—the aging of the U.S. population—growing overseas demand and the sector’s capacity for reliable innovation are long-term tailwinds behind the sector. 

Looking Ahead to Earnings, Home Sales and Durable Goods

The U.S. markets and our offices will be closed tomorrow in observance of Good Friday. We’ll be back at our desks and ready to assist you on Monday morning.

By the end of next week, we expect to have seen enough earnings reports to call a trend based on what corporate leaders tell us about how their companies have done and, more importantly, what they see on the horizon. We’ll also get economic data on home sales, durable goods and consumer sentiment as well as the Commerce Department’s initial estimate of first-quarter economic growth.  

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 Thursday, April 18, 2019, 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.

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