Monthly Strategy Review: Braver Capital September 2018 Update

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  • S&P 500 Hits Record High as Slow Economic Growth Continues

  • Sector Analysis: Communication Stocks Gain, Emerging Markets Fall

  • Investment Strategy Review

S&P 500 Hits Record High as Slow Economic Growth Continues

The S&P 500 index hit a new all-time high on the way to gaining 0.6% in September, closing out an impressive third quarter wherein the index rose 7.7%, its best quarterly result since 2013. So far this year, the S&P 500 is up 10.6%.

Our slow-growth-not-no-growth economy continued to support broad-based gains. Safeguarding against inflationary growth, the Federal Open Market Committee met and (as expected) raised the fed funds rate 0.25% from 1.75%–2.00% to a range of 2.00%–2.25% in the last week of September. Sticking to the forecasted once-per-quarter pace, this was the third rate hike this year and eighth of this tightening cycle. These rate moves reflect a steady and growing confidence in our economy’s strength. And as we head toward year-end, the markets are pricing in a 70% chance of one more increase following December’s meeting.

Thus far, investors have taken higher interest rates in stride. Rightly so. Inflation continues to hover around the Federal Reserve’s 2% target. Robust economic growth has supported expectations of higher wages and low unemployment going forward, giving both the policymakers and investors reasons for optimism.

While gains were the rule, stock market volatility was scarcely found. In fact, volatility hovered near all-time lows for much of the quarter. Nevertheless, under the calm surface, stock- and industry-specific factors drove a wide range of sector winners and losers.

Sector Analysis: Communication Stocks Gain, Emerging Markets Fall

The newly revamped communication services sector (formerly known as “telecommunications”) topped the heap, returning 4.3% for the month. Health care, energy and industrials were close behind, all gaining more than 2.0% in September. The health care sector has shown consistent strength and is now up 16.6% year-to-date, bringing it closer to par with the year’s leaders, technology and consumer discretionary stocks. Strong fundamentals and consumer sentiment have driven these sectors to a matching 20.6% return year-to-date. Materials, financials and real estate stocks trailed in September, all down over 2.0%. The weakness in real estate can partly be attributed to a decrease in demand, as mortgage rates rose in September.

Overseas, economic growth remains more challenged and sporadic. Imposed tariffs and threatened trade wars only add to uncertainty and volatility. As a result, foreign stocks posted mixed results in September: The MSCI EAFE index, a broad measure of developed markets, gained 0.9% for the month, but is still down 1.4% in 2018. The MSCI Emerging Markets index fell 0.5% in September and is down 7.7% this year.

Fixed-income sectors were mixed in September. The Bloomberg Barclays U.S. Aggregate Bond Index (a measure of high-quality U.S. bonds) slumped 0.6% over the month, bringing its total return to -1.6% for the year. U.S. Treasurys also lagged, with the Bloomberg Barclays U.S. Treasury Index down 0.9% in September—it is off 1.7% for the year. Meanwhile, U.S. high-yield corporate bonds continued to lead, gaining 0.6% in September and they are now up 2.6% year-to-date.

Investment Strategy Review

The managers of our Dividend Income portfolio continue to allocate a greater percentage of assets to stocks in the financial and technology sectors than you’ll find in our S&P 500 index benchmark. Conversely, we have lower-than-market exposure to real estate stocks, as these companies typically are sensitive to rising interest rates. In September, we reduced our technology holdings by selling the stock of a semiconductor equipment maker because of the cyclical nature of its business. The proceeds of the sale increased the portfolio’s cash position. The current dividend yield on the portfolio is approximately 2.5%.

In our Global Tactical Balanced portfolio, we opened a new position in pharmaceuticals to start October while trimming exposure to corporate and international bonds. At the same time, we added 5% to foreign equities—buying ETFs focused on companies in France and Taiwan. This pushed the portfolio’s equity allocation up to 65%. Most of that (45% of the portfolio) is in U.S. stocks, spread across allocations to a broad market index as well as technology, consumer discretionary and pharmaceutical sector-specific ETFs. A small portion of the portfolio is invested in a diversified commodities ETF.

Tactical Balanced is in its most aggressive positioning with a 75% allocation to stocks through an S&P 500 ETF. The remaining 25% of the portfolio is in cash.

There were no changes in the Tactical High Income portfolio during the month. The portfolio continues to be fully invested across a diverse basket of high-yield funds and ETFs. The high-yield market, supported by low default rates and strong corporate fundamentals, has shown strength.        

We executed several trades in our Tactical Opportunity portfolio in September, taking advantage of volatility in various sectors. We sold an ETF focused on financial stocks to buy one dedicated to the health care sector. The portfolio also maintains exposure to consumer discretionary stocks based on that sector’s strong relative performance. At the beginning of October, we reduced risk in the portfolio. Currently, 50% of the portfolio is in cash with the remainder invested in equities.

We also executed several trades in the Tactical Sector Rotation portfolio at the start of October. Real estate was replaced by industrials, which have shown positive momentum since the end of June. In addition, telecom replaced semiconductors (a longtime holding). Most sectors have experienced positive recent performance, but the model relies on relative performance to determine rankings. The portfolio continues to hold 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.

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.