What’s on Tap: Headline Fears Spook Traders

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  • Fear-Driven Losses Offer Long-Term Opportunity

  • Economic Expansion Persists: GDP Indicates 3.5% Growth

  • Sales Grow More Slowly on Consumer Caution, Higher Prices

  • Watch Housing’s Foundations: New Home Sales Drop

  • Quarterly Webinar: Don’t Give Up on Diversification

  • Looking Ahead to Key Economic Data

No doubt about it—October’s markets have brought more tricks than treats with no shortage of frights real and imagined spooking trigger-happy Wall Street traders and leading to a slew of selloffs. Take your pick: Trade-war concerns and tensions with China, rising interest rates, political uncertainty leading up to and through the midterms, slowing earnings growth, a maxed-out tech sector, a waning tax-cut sugar high… we could go on and on.

We think the data is noisy, preventing investors from getting a clear signal when it comes to the market’s health. Big picture, the economic, earnings and interest-rate data remain, on balance, reasonably good. But those fundamentals must be weighed against investor sentiment, where fear seems to be trumping greed.

For a more expansive view on what we’re seeing and thinking, you can watch the replay of our fourth-quarter webinar, Don’t Give Up on Diversification. Details on how to stream the event on-demand are below.

For the year through Thursday, the Dow Jones Industrial Average has returned 2.9%, while the broader S&P 500 has gained 2.8%. The MSCI EAFE index, a measure of developed international stock markets, is down 10.8%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has climbed to 3.56% from 2.71% at 2017’s end. On a total return basis, the U.S. bond market has declined 2.2% for the year.

Fear-Driven Losses Offer Long-Term Opportunity

We think a Barron’s headline put it best after the Dow dropped 3.2% on October 10: “Dow Drops 832 Points and No One Has a Clue.” Prior to yesterday’s rebound, market indices (not counting reinvested dividends) showed fractional losses for the year. The simplest answer for why stocks have fallen: Sellers willing to take lower prices for the stocks they owned. On the flip side, their sales were met by buyers ready to snap stocks up when prices fell more than they should have (see yesterday’s rally). Sellers need buyers, and vice versa, to complete any transaction—in the stock market, “value” is definitely in the eye of the beholder.

The good news? At least for now, fear-driven losses present opportunities for long-term investors, even if the near-term risks spur greater volatility.

Economic Expansion Persists: GDP Indicates 3.5% Growth

The U.S. economy continues to expand. That’s the takeaway from this morning’s first estimate of gross domestic product (GDP) showing the economy grew at a 3.5% annual rate during the third quarter. Consumers helped to drive that growth, spending 4.0% more on an annualized basis, the biggest increase in almost four years. Government spending, particularly on defense, also sparked growth.

The fly in the ointment of today’s GDP report: Slumping business investment, another area, like corporate earnings, where the tax-cut buzz seems to have worn off. Businesses spent only 0.8% more on capital expenditures—including new or remodeled factories, software improvements and equipment upgrades—in the third quarter, compared to an 11.8% increase in Q1 and 8.7% in Q2. 

Sales Grow More Slowly on Consumer Caution, Higher Prices

’Tis still the season for corporate reports on profits earned during the third quarter. As mentioned in prior updates, we believe the rate of profit growth will slow in the quarters to come. We saw a harbinger of what that could look like with a recent report indicating slowing sales growth (top-line revenues). Cautious consumers, the stronger dollar and higher costs are some of the reasons being cited for the slowdown in revenue growth. Still, estimates are that revenues will rise 7.6% year-over-year—the slowest growth rate in three quarters.

As with sales, which are still rising, but at a slower pace, earnings are also still rising, but they’ll likely begin to come in at a more gradual rate toward year-end or in early 2019. Not only will the impact of lower corporate tax rates begin trailing off, but tougher comparisons with the prior year’s faster pace will make investors antsy. Just remember, there’s a huge difference between slower growth and no growth.

Watch Housing’s Foundations: New Home Sales Drop

New home sales, which account for about 10% of the overall housing market, are also in contrast with rosier economic reports. Sales in September dropped to a near two-year low, reflecting ongoing slowing in the housing market. This morning’s GDP report confirmed that housing acted as a headwind on economic growth for the third consecutive quarter, with residential investment down 4.0%.

The pullback is not being driven by an unhealthy lack of demand so much as by demand driving prices higher and higher. Together with rising mortgage rates, listings have begun to price out a segment of potential buyers. When prices drop to more reasonable levels, or supply increases, a second wave of price-conscious yet able buyers could be ready to step in. We’re watching trends in the housing market closely for indications of a broader slowdown, but for now, these appear to be resolvable growth-related problems. 

Quarterly Webinar: Don’t Give Up on Diversification 

If you haven’t had a chance to listen yet, consider this a friendly reminder that our fourth-quarter webinar, Don’t Give Up on Diversification, is now available for your viewing and listening pleasure on demand. The event features commentary from Braver Capital Management’s Portfolio Manager Steve Johnson, Chief Investment Strategist Charlie Toole and Equity Research Analyst Kate Austin, who comment on the investment environment, share our outlook and answer your pre-submitted questions.

Please click here to watch Don’t Give Up on Diversification on demand!

Looking Ahead to Key Economic Data

Next week, we see several potentially market-moving reports. To name a few: Personal income, spending and savings, consumer confidence, home prices, inflation, manufacturing activity, construction spending, car sales and multiple reads on the job market, including the October unemployment rate.

Clearly, we’ve been in a period of calm, but it’s a calm that’s slowly giving way to less tranquil markets, even as U.S. stocks are still near record highs. If the recent declines have had you on edge or kept you up at night, or the large rebounds have had you feeling euphoric—all in the span of a week or so—that may be a sign that there’s too much risk in your portfolio. If you want to talk it over, we’re always here to discuss it with you.

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, October 26, 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.