Monthly Strategy Review: Braver Capital August 2018 Update

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  • Geopolitical Risk, Trade Disputes and the U.S. Dollar

  • Sector Analysis: Tech Stocks Surge

  • Investment Strategy Review

Geopolitical Risk, Trade Disputes and the U.S. Dollar

U.S. stock markets closed out the final days of summer with domestic benchmarks rallying higher on solid corporate earnings and robust economic data. Meanwhile, continuing geopolitical risks, trade disputes and U.S. dollar strength weighed on foreign bourses.

Second-quarter earnings for S&P 500 companies were about 25% higher than year-ago numbers as economic data showed no slowdown in the pace of U.S. economic expansion. Gross domestic product (GDP)  grew at a 4.1% annual pace. And retail sales rose in July more than economists expected. Though wage growth has been modest, the strong labor market and healthy household balance sheets suggest we will see further growth in the second half of the year. U.S. investors applauded positive developments throughout the month, with the S&P 500 returning 3.3% (including dividends) and cruising past its previous high set in January.

Late in the month, Wall Street focused on Federal Reserve Chair Jerome Powell and his long-anticipated speech at Jackson Hole, as investors searched for any clue of a change in U.S. monetary policy. Reading the tea leaves, Powell essentially confirmed the Fed’s intent to keep the pace of interest-rate hikes steady at 0.25% per quarter.

International markets remained burdened by the combination of a strong U.S. dollar, political uncertainty in the U.K. and Europe, and the Trump administration’s hard-hitting tactics on trade. Tensions and talk of a trade war between the U.S. and China intensified, though a tentative deal struck with Mexico in the last week of the month provided some optimism.

As the U.S. boosted tariffs on Turkey’s steel and aluminum exports, cracks that had already been showing in the Turkish economy broke wide open. A major decline in the lira spurred investor worries of contagion into other markets. The divergence between U.S. markets and foreign markets continued in August as the MSCI Emerging Markets Index fell 2.7% for the month. Developed markets fared slightly better; the MSCI EAFE Index dropped 1.9%.

Sector Analysis: Tech Stocks Surge

Most U.S. stock market sectors gained in August, with cyclically sensitive, high-growth stocks seeing the greatest gains. Technology stocks once again surged ahead, up 6.9% for the month—year-to-date gains stood at a whopping 21.0%. Consumer discretionary stocks have not been far behind, gaining 5.1% in August and 19.4% for the year. A strong consumer, tax reform and investor optimism have been especially beneficial to these stocks. Health care stocks also outperformed, gaining 4.4% on the back of high-growth subsectors such as biotech and pharmaceuticals.

Industrial stocks and consumer staples shares were slightly positive in August, while energy companies gave back some recent gains, declining 3.3%. The only other sector in the red for the month was the basic materials group, which fell 0.5%.

Bond markets followed the same pattern—U.S. bonds were positive across the board last month, while emerging-market debt struggled. High-yield corporate bonds continued to post strong results, up 0.7% in August and 2.0% year-to-date. Overseas investors, nervous about the tumult in emerging markets, sought the safety of U.S. Treasurys. The Bloomberg Barclays U.S. Treasury Index finished with a 0.8% return for the month. The Bloomberg Barclays U.S. Aggregate Bond Index (a measure of high-quality U.S. bonds) posted a respectable 0.6% return.

Investment Strategy Review

Built stock-by-stock from a bottom-up perspective, Dividend Income’s concentrated stock portfolio remains overweight to the financial and technology sectors and underweight real estate compared to the S&P 500. In August, we added three defensive consumer stocks with relatively higher yields to the portfolio. We also increased exposure to the communications sector. At 2.5%, the portfolio’s current dividend yield is more than 30% higher than the S&P 500’s 1.9% yield.

With U.S. stocks and bonds outperforming foreign counterparts, our Global Tactical Balanced strategy continues to favor domestic securities. Nearly 45% of the portfolio is invested in U.S. equities, with specific allocations to technology and consumer discretionary stocks. In August, we reduced exposure to European equities and added to bonds, which now make up about a third of the portfolio. We still have 15% of the portfolio allocated to foreign developed stocks as well as a small, 6% allocation to a diversifying position in commodities.

The Tactical Balanced strategy remains at its most aggressive equity positioning with a 75% weighting to the S&P 500. In August, we sold the high-quality bond fund that had been held since the end of May, leaving a quarter of the portfolio in cash.

We initiated no changes in the Tactical High Income portfolio during the month. The portfolio remains fully invested across a diverse basket of high-yield funds and ETFs. The high-yield market continues to show strength, supported by low rates of defaults and strong corporate fundamentals.

In an attempt to take advantage of market volatility in various sectors, Tactical Opportunity traded several times over the past month, adding exposure to consumer discretionary shares and an existing position in financial stocks. At the end of the month, 80% of the portfolio was invested in equities with 20% in cash.

We executed one trade in Tactical Sector Rotation at the start of September. Industrial stocks were replaced by real estate securities, which have shown positive momentum and relatively strong performance since the end of July. The portfolio continues to hold stocks in sectors showing persistent 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.