Monthly Strategy Review Braver Capital: August 2019

  •  Market Analysis

  • Investment Strategy Review

Market Analysis

Escalating trade tensions and recession fears garnered headlines in August. While bond markets rose, stock markets gave way to investor uncertainty.

Volatility prevailed as the S&P 500 index experienced intraday swings of 1% or more during 16 of the month’s 22 trading days, compared with just two such days in July. In addition, there were 10 days when the index finished more than 1% higher or lower than its prior close—this happened just once in July. Down as much at 5.2% mid-month, the S&P 500 index ended August down 1.7%. Perspective: On a total return basis, the S&P 500 has returned 18.3% year-to-date.

The intensifying trade wars are a headwind to current economic growth, as seen in the decline in manufacturing activity in August. That said, domestic equities continue to be supported by sturdy corporate and economic fundamentals. The labor market is strong and consumers are spending at a robust pace, which bodes well for near-term economic prospects.

Worries about growth and negative trade sentiment weighed more heavily on foreign stocks—the MSCI EAFE index, a broad measure of stocks in developed markets, fell 2.6% and the MSCI Emerging Markets index dropped 4.9%.

Recession fears were reflected in the relative performance of various U.S. stock market sectors. Investors favored the high-quality, low-volatility stocks in the utilities, real estate and consumer staples sectors, all of which gained ground in August, while the remaining eight S&P sectors posted losses. Financials and energy stocks were the month’s worst-performing groups.

Bond yields fell across the board, contributing to gains for the fixed-income markets. The Bloomberg Barclays U.S. Aggregate Bond index—a broad measure of high-quality bonds—returned 2.6%. The Bloomberg Barclays U.S. Treasury index returned 3.4%, driven by investor demand for long-term safety. As economic concerns have not yet materialized in corporate credit markets, riskier “junk” bonds continued to show strength as well. The Bloomberg Barclays U.S. Corporate High Yield index returned 0.4% for the month.

As yields kept falling, the bond market flashed another recession warning sign. The yield on the benchmark 10-year Treasury fell below that of the 2-year Treasury. This inversion wasn’t particularly surprising, as the spread between 3-month and 10-year Treasurys had been negative since March. But it did generate headlines.

And with the 30-year Treasury yield falling below 2% for the first time in history, all signs point to the same conclusion by bond investors—slower economic growth ahead.

Investment Strategy Review

We made no changes to the Dividend Income portfolio in August. At the end of the month, our 2.5% dividend yield compared favorably to the 1.9% dividend yield for the S&P 500 index, our benchmark. The bottom-up stock-selection process we employ yields a portfolio that continues to overweight health care, financials, consumer staples, utilities and industrial stocks relative to the S&P 500.

Our Global Tactical Balanced strategy’s signals have resulted in trades aimed at paring back risk in the portfolio—we eliminated the individual country ETFs we held and added to U.S. Treasurys and international bonds. Currently, 25% of the portfolio is invested in stocks, about 18% is in real estate and the remaining 57% is invested in bonds and cash.

At the beginning of September, one of the models in our Tactical Balanced strategy triggered a trade that swapped its holdings in an S&P 500 ETF for a high-quality bond ETF. As a result, the strategy is currently 50% invested in an S&P 500 ETF and 50% is in high-quality bonds.

Our Tactical High Income investment strategy continues to benefit from the strength in the high-yield bond market. The strategy remains 100% invested in high-yield ETFs.

Our Tactical Opportunity strategy was active for the month, reducing exposure to stocks. The portfolio is currently 65% in equities and 35% in cash. Our equity exposure is in consumer staples, real estate and broad market ETFs.

Tactical Equity Sector Rotation swapped out of technology and added real estate during the final week of August. The portfolio is fully invested in stocks, with half of the assets in an S&P 500 ETF. The rest is split between three sector ETFs—consumer staples, utilities and real estate.

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.

The terms “high-quality bonds” and “investment-grade bonds” when used in the Our Strategies section refer to funds that primarily invest in bonds rated BBB or higher by at least one rating agency.

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.

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