What’s On Tap: Much To Be Thankful For

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  • Despite Doom-and-Gloom Headlines Economic Fundamentals Reflect Slow Growth

  • The Housing Market’s ‘Growth Problem’: Existing Home Sales Rise Slightly

  • A Blue-Chip Turns Red as General Electric Nears ‘Junk’ Status

  • Looking Ahead to Fed Minutes, Manufacturing and Consumer Data and More

We trust you, your family and friends enjoyed a bountiful feast and a happy Thanksgiving. 

One thing to be thankful for: Our market and its attendant headline folderol were silent for a day. As markets opened for Friday’s abbreviated half-day session, we’re right back where we left off—market volatility sparked by unfounded fears and assumptions in opposition to fundamental facts.

We’re sure you know the litany by heart: Possible trade wars, a potential long-term slowdown in global and domestic growth, the ongoing Mueller investigation, worries about the Federal Reserve being too aggressive with its rate hike regimen, Iran, Saudi Arabia, China, Russia, Brexit … the list goes on and on. 

We believe that the recent market rout reflects traders anticipating difficulty ahead and re-pricing markets according to what may or may not in fact ever materialize. We see nothing in the fundamentals (earnings, interest rates, economic data) to suggest slow growth will suddenly veer into no growth. Still, we get it: While there is no sign of near-term economic recession, the markets have entered a kind of recession of their own.

For the year through Wednesday, the Dow Jones Industrial Average has returned 1.0%, while the broader S&P 500 has gained 0.8%. The MSCI EAFE index, a measure of developed international stock markets, is down 10.1%. At Wednesday’s close the yield on the Bloomberg Barclays U.S. Aggregate Bond index had climbed to 3.56% from 2.71% at 2017’s end. On a total return basis, the U.S. bond market has declined 2.0% for the year.

Despite Doom-and-Gloom Headlines Economic Fundamentals Reflect Slow Growth

For all of the market turmoil in October and November, U.S. stock markets are essentially back to where we started the year, yet we still have plenty to be thankful for. Interest rates remain low. Corporate profit growth is robust. Employment is very, very strong. For all of the uncertainty surrounding the global economy and trade, the consumer is still spending and early reports on Black Friday sales suggest a healthy start to the holiday shopping season. Anyone who bets against a well-employed, deep-pocketed U.S. consumer typically does so at their own investment peril. 

That said, it’s often negativism that garners readers’ eyeballs and we’re always a bit taken aback by some of the headlines and commentary that accompany any market decline. One example this week: A Bloomberg article headlined “Worst day of an awful year leaves no corner of U.S. financial markets unscathed.” Using a “back of the envelope” measure of returns for the best-performing asset of the year, the piece claimed that this is the worst or hardest year to invest since the early 1970s—almost half a century. Pure hogwash. 

After more than nine years of a bull market, traders selling stocks to take profits is simply the natural ebb and flow of the markets. We don’t see a recession in sight just yet, so whatever traders are doing right now to reset prices in the stock market is just that—a reset. The fact that no asset class is a standout in 2018 means very little. 

The recent market sell-off feels somehow worse than it really is. On a total return basis, the S&P 500 is just 9.3% below the all-time high of just two months ago—and remember, in the average year, the S&P 500 drops 14% at some point during the course of 12 months. We aren’t even at an average intra-year decline yet, and may never see one. It’s perfectly natural for the markets to make a course correction. 

The Housing Market’s ‘Growth Problem’: Existing Home Sales Rise Slightly

With price increases slowing a bit, sales of existing homes rose 1.4% in October, the first monthly increase in six months. Along with consumer retail spending, the housing market has been a catalyst for growth as the ongoing economic recovery took hold. This year though, we’ve seen homebuilders’ confidence held in check by higher mortgage rates, low inventory and stubbornly high prices holding potential buyers back.

In part, the Fed, seeking to throttle the kinds of inflated home prices that helped lead to the 2008 financial crisis, has been raising the fed funds rate incrementally, which in turn has led to the aforementioned higher mortgage rates. What’s lacking isn’t financially healthy would-be buyers but a dearth of inventory. Something will give and we think the inventory issues will be resolved as would-be sellers realize that they can’t push prices higher than the market will bear.

A Blue-Chip Turns Red as General Electric Nears ‘Junk’ Status

As one of our investment analysts made clear earlier this year, the days of rock-solid, widows-and-orphans blue-chip stocks are over. General Electric (GE) used to be a one-decision, buy-and-hold-forever blue-chip with a strong dividend and a solid credit rating. Today, its business is in a shambles and bondholders are bracing themselves for the company’s debt to be downgraded to “junk” status, a sign that its ability to repay its lenders is increasingly at risk. 

GE’s well-publicized fall from grace has seen its stock plunge (from $60 per share at its August 28, 2000 peak to $7.65 at Wednesday’s close) and its dividend slashed to 1 cent per share. This latest round of worries has some market “gurus” (and we use the term lightly) wondering whether the downgrade of the world’s sixth-most indebted nonfinancial company will have a contagion effect on the broader fixed-income markets.

Once rated AAA by S&P—the highest credit rating available and akin to the rating on U.S. Treasury debt—GE’s bonds are now at BBB+. If it is downgraded further, GE’s enormous presence could reshape the high-yield, or “junk,” debt market.

But this is not a virus that will explode into a full-blown epidemic; it's more a story of one company’s financial mismanagement and over-reliance on borrowing instead of organic growth. 

Our investment moral: Today’s blue-chip companies may not be the blue-chips of tomorrow, and GE (like Polaroid, Xerox and Sears among a host of others before it) provides a valuable reminder that you should never take any investment’s strength and longevity for granted. The Braver Capital team knows these lessons well and we task ourselves with never being complacent, always cross-checking our analysis and assumptions, and keeping our risk-aware guard up. 

Looking Ahead to Fed Minutes, Manufacturing and Consumer Data and More

Next week brings a range of useful reads on the economy, including on house prices, new-home sales, pending home sales, manufacturing, consumer confidence, income and spending, the minutes from the Federal Reserve’s meeting earlier this month and an updated estimate of third-quarter economic growth (GDP). 


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, November 23, 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.

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