Monthly Strategy Review: Braver Capital October 2018 Update

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  • Midterm Elections, Geopolitics Increase U.S. Market Volatility

  • Sector Analysis: Tech, Biotech Fall; Consumer Staples, Utilities Outperform

  • Investment Strategy Review

Midterm Elections, Geopolitics Increase U.S. Market Volatility

As we expected, the weeks leading up to the midterms saw increased market volatility. The S&P 500’s 6.8% decline in October was its worst monthly return in seven years. Slow-growth-not-no-growth economic data and a relatively strong earnings season did not quell fears over escalated rhetoric on tariffs, trade wars and rising interest rates.

Volatility jumped higher in October from unusually low levels over the summer. In August and September, the S&P 500 index did not experience a 1.0% daily move in either direction. Nearly half of the trading days in October exceeded that threshold, including three days of greater-than-2% declines. And U.S. small-caps took a tumble from their top perch this year as the S&P 600 index fell 10.5%.

Investors also added a dose of unforeseen geopolitical risk to their list of worries. The assassination of a Saudi Arabian émigré (and U.S.-based journalist) by Saudi emissaries on Turkish soil shocked the world and led to fears of Middle East instability. Foreign bourses were a sea of red in October. The MSCI EAFE index, a broad measure of developed markets, fell 8.0% over the month, and is now off 8.9% in 2018. The MSCI Emerging Markets index declined 8.7% in October and is down 15.5% this year.

Sector Analysis: Tech, Biotech Fall; Consumer Staples, Utilities Outperform

October’s risk-off sentiment was clearly displayed across the sector landscape. Many of this year’s high-flying technology and biotech companies contributed to the drop, while defensive market segments, which had previously lagged the markets this year, outperformed. Consumer staples and utilities stocks were up over 2.0% for the month, though both sectors had been trailing broad stock market indexes by a wide margin. Consumer discretionary, the leading sector heading into October, took an 11.3% hit and is now up just 7.0% for the year. Meanwhile, despite a tough month, the broad technology and health care sectors remain on top for 2018.

In the fixed-income arena, yields rose and prices dropped across most sectors. U.S. Treasury bonds provided only relative sanctuary—the Bloomberg Barclays U.S. Treasury Index was down 0.5% in October and is off 1.7% for the year. The Bloomberg Barclays U.S. Aggregate Bond Index (a measure of high-quality U.S. bonds that includes Treasurys and corporate issues) fell 0.8% during the month and is now down 2.4% for the year. After outperforming for much of 2018, U.S. high-yield corporate bonds took a step back in October, falling 1.6%. That group is up 0.9% year-to-date.

Investment Strategy Review

In October, we reduced Dividend Incomes exposure to the materials sector by selling a global paper company that had come under pressure from Chinese competitors. With the proceeds of the sale, we added to positions in the utilities and communication services sectors. And, as stocks sold off during the month, valuations became more attractive and we purchased a leading home improvement retailer with solid growth prospects and an attractive dividend. We also bought shares of a leading global food and beverage company. The current dividend yield on the portfolio is approximately 2.5%.

As November opened, we de-risked Global Tactical Balanced’s portfolio by selling a significant portion of a broad U.S. stock market ETF and eliminating our exposure to foreign equities. Proceeds from these sales were allocated to global bonds and mortgage and equity REITs, as well as U.S. health care stocks. Less than a third of the portfolio is invested in stocks. A small portion of the portfolio is invested in a diversified commodities ETF.

Weakness during the month of October triggered a sale in one of the S&P 500 models in our Tactical Balanced portfolio. Conversely, we bought a broad U.S. bond market ETF on strength. The portfolio is currently allocated 50% to stocks, 25% to bonds and 25% to cash. 

A sale was triggered in our Tactical High Income portfolio near month’s end as high-yield bonds sold off in concert with the stock and broader bond markets. The portfolio is currently 100% in cash. 

Investors in our Tactical Opportunity strategy entered October in a defensive position, with 50% of the portfolio in cash. We executed several trades during the month and that cash allocation has now climbed to 75% of assets. Health care and utilities stocks make up the remaining quarter of the portfolio.

We also made several trades in the Tactical Sector Rotation portfolio at the start of November. The cyclical sectors (energy and industrials) were sold and replaced with the more defensive sectors (consumer staples and utilities). Biotechnology stocks experienced deeper losses than other sectors and were replaced by real estate stocks. We continue to hold sectors exhibiting positive momentum 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.

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 herein are obtained from what we believe to be reliable sources; however, their accuracy, completeness, or reliability cannot be guaranteed.

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