Monthly Strategy Review: Braver Capital July 2018 Update

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  • Global Stock Markets Upbeat; Yield Curve Almost Flat
  • Sector Analysis: Industrials, Health Care and Financials Lead Gains
  • Investment Strategy Review

Global Stock Markets Upbeat; Yield Curve Almost Flat

July was an upbeat month for global stock markets, despite the numerous risks still threatening to break the summer doldrums. Traders must have been on break at the beach, as volatility remained near its low for the year.

Investors focused more of their attention on improving business and economic fundamentals—corporate earnings increased 24% from last year and U.S. economic growth topped an annualized 4.1% in the second quarter— than on trade and geopolitical concerns. The S&P 500 index returned 3.7% in July and, on a total return basis, is just 1.0% below its January peak.

Investor sentiment improved in foreign developed markets after a meeting between President Trump and Jean-Claude Juncker, president of the European Commission, led to a verbal agreement that the two sides would work toward “zero tariffs.” The MSCI EAFE index, a measure of foreign developed stock markets, returned 2.5% for the month.

The U.S.-China trade-and-tariff spat continued to sour, however, and the MSCI China index fell 2.5% in July. The broader MSCI Emerging Markets index fared better, up 2.2%, boosted by a strong reversal in Brazil and continued strength from India and Russia. As always, we have a close eye on geopolitical developments and their potential to weaken the ongoing global economic expansion.

The shape of the yield curve—a line representing and comparing bond yields across multiple maturities—and the potential for its inversion remain a focus for investors. Historically, when the yield curve inverts (meaning that long-term bonds yield less than short-term bonds), it has been an early signal that a recession is a year or two away. But an almost-flat yield curve, which is what we’re seeing today, hasn’t been very useful in predicting the future direction of the economy or stock markets. While this yield-curve signal is flashing yellow, it isn’t something we’re overly concerned about just yet.

Sector Analysis: Industrials, Health Care and Financials Lead Gains

All 11 sectors of the S&P 500 index posted gains in July—with industrials, health care, and financials leading the pack. The industrials sector was up 6.7% for the month, in part due to geopolitical concerns causing investors to bid up prices of aerospace and defense stocks, which is the largest industry group within the sector.

While returns at the sector level suggest July was a calm month for the market, below the surface, individual names and industries exhibited greater divergence. Despite the technology sector’s 2.0% rise in July, Facebook’s stock dropped 20% in a single day after the company reported that its user growth flatlined in the U.S. and dropped in Europe. On the other hand, Advanced Micro Devices (also known as AMD) jumped 22% in July after the company reported earnings that beat expectations and revenue growth of 43% from a year ago.

The bond market was mixed, with the Bloomberg Barclays U.S. Aggregate Bond index (a measure of high-quality U.S. bonds) flat in July. High-yield corporate bonds were strongest, with a 1.1% gain, as a robust U.S. economy has kept defaults low. U.S. Treasury Inflation Protected Securities (also known as TIPS) dropped 0.5% as expectations for future inflation remain muted.

Investment Strategy Review

Built stock-by-stock from the bottom up, our Dividend Income portfolio remains overweight companies in the financial sector and has a lower-than-market exposure to real estate. This past month, we took some risk off the table within the consumer sector by rotating out of our more aggressive positions into ones we expect to be more defensive. The current dividend yield on the portfolio is approximately 2.5%.

Trades executed during the first days of August raised exposure to U.S. stocks and bonds in our Global Tactical Balanced portfolio from 30% to about 55%. A strong corporate-earnings season and positive economic data boosted sentiment and lifted the S&P 500 for the month. A little less than a third of the portfolio is allocated to fixed-income investments, split evenly between U.S. and international bonds. About 60% of the portfolio’s assets are in stocks and a small portion of the portfolio continues to hold a diversifying position in commodities.

Our Tactical Balanced strategy added an additional 25% position in U.S. stocks during the second week of July, leaving the portfolio positioned in its most aggressive allocation—75% S&P 500 and 25% U.S. bonds. A positive start to corporate-earnings season raised sentiment throughout the month, confirming domestic equity markets’ relative strength.

No trades were made in the Tactical High Income portfolio in July. The portfolio remains fully invested across a diverse basket of high-yield bond funds and ETFs. The high-yield bond market’s continuing strength is supported by a low default rate and healthy corporate fundamentals.

Tactical Opportunity’s portfolio shifted from holding a broad selection of mid-cap stocks to a more focused exposure to the financial and real estate sectors during July. Financial stocks were the third-best performing sector for the month, as many of the big banks posted solid Q2 earnings. Real estate has lagged other sectors this year, but performance has improved recently and fundamentals still support the sector. After a recent signal to sell long-maturity U.S. Treasury bonds, 22% of the portfolio was in cash heading into August. 

A couple of trades were made in Tactical Sector Rotation at the start of August. Most sectors have experienced positive recent performance, but relative strength in the industrial and pharmaceutical sectors—which were among the top performing areas of the market in July—boosted them into the model’s top rankings, and, hence, into the portfolio. The investing strategy continues to focus on sectors showing persistently strong trends this year: Consumer discretionary, technology and health care.

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.

Dividend yield does not represent portfolio performance and should not be construed in such a manner.

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.

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