Trade-Talk Optimism Sparks Stock Rally

  • Global Markets Rise on Hopes, Not Solutions

  • Fed Readies Another Interest-Rate Cut

  • ISM Reading: Contraction Does Not Equal Recession

  • Rent or Buy? Four Key Factors to Consider

  • Looking Ahead to Consumer Credit, Job Openings and Retail Sales

Stop us if you’ve heard this one before: Stocks rallied this week on hopes that trade talks between China and the U.S. will resume.

Because stocks have jumped on news of trade talks and retreated when those talks disappointed so many times in the past, we remain cautious and watchful in our analysis of the economic and market impacts of this on-again, off-again trade war.

For the year through Thursday, the Dow Jones Industrial Average and the broader S&P 500 have returned 16.6% and 20.4%, respectively. The MSCI EAFE index, a measure of developed international stock markets, is up 11.6%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has tumbled to 2.17% from 3.28% at 2018’s end. On a total return basis, the U.S. bond market has gained 8.8% for the year.

Global Markets Rise on Hopes, Not Solutions

This week’s move in the British Parliament to block Prime Minister Boris Johnson’s path toward a no-deal Brexit brought no new clarity to how, when or even if the U.K. will ultimately split from the European Union. While a no-deal Brexit appears to have been temporarily taken off the table, there’s no recipe for either a plan of action or a lasting deal.

Without solutions to the U.S.-China trade disputes or an acceptable Brexit, but with all sides avoiding the most calamitous endgames, investor fears have been lessened. For now, the global markets are pricing in status quo and delay as if they are solutions. They aren’t, and we suggest you prepare to see uncertainties rise again before the final chapters of these sagas are written.

Fed Readies Another Interest-Rate Cut

Federal Reserve policymakers appear poised to cut benchmark interest rates by another 0.25% at the close of their scheduled two-day meeting on September 18. Fed governors are hinting that the U.S.-China trade war’s impact on global growth is the catalyst. As we’ve discussed, this seems to be a significant shift from policy driven purely by economic data to proactive moves based on unsure outcomes.

Contrary to those who say we are speeding into recession, we think we are heading slowly—very slowly—toward a trade-war-related, self-inflicted recession if our dispute with China doesn’t dissipate sometime in the next year or two.

Even if all is resolved between the two sides, there’s no ignoring that global growth is decelerating and has the potential to eventually drag our own economy into a recessionary vortex.

That said, the U.S. economy tends to be better insulated than other countries because we are less reliant on exports—the driver of our economy is U.S. consumers. So it’s possible we could muddle through as growth in the rest of the world slips backward.

ISM Reading: Contraction Does Not Mean Recession

Outside of Britain and China, the big economic report in this week’s headlines was the Institute for Supply Management’s (ISM) manufacturing index, which suggests an end to a 35-month stretch of expansion. But does this mean recession is nigh? Not yet.

First, the ISM’s reading signaled contraction, not recession. The index would need to fall a lot further to be in recession territory.

Second, we’ve seen this indicator signal a slowdown many times over the course of the current expansion—for three months in 2012, once in 2013, for five months in 2015 and once again in 2016. The August data confirms that tariffs and trade uncertainty have slowed activity in the manufacturing sector, but it does not signal that a recession is fast approaching.

Third, the ISM report is a survey—as much a sentiment gauge as a data indicator. We know negativity abounds, but consumption data suggests that consumers are still spending and gainfully employed. And the companion ISM report on the non-manufacturing sector, a.k.a. the “service sector” that accounts for a much larger portion of our economy, showed expansion in August, with new orders and business activity increasing from July.

Note: Chart shows monthly values for the ISM’s manufacturing PMI and non-manufacturing PMI (the latter represented by “Service” in the chart) indexes from July 1997 through August 2019.  Source: Institute for Supply Management.

Note: Chart shows monthly values for the ISM’s manufacturing PMI and non-manufacturing PMI (the latter represented by “Service” in the chart) indexes from July 1997 through August 2019.

Source: Institute for Supply Management.

Our takeaway: Before we get too worried about whether the ISM manufacturing data is suggesting recession, we want to see the weakness confirmed in other hard-data reports—like the one on retail spending coming out next week. This morning’s encouraging jobs report for August suggests that the week’s weak manufacturing read may be an anomaly.  

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Rent or Buy? Four Key Factors to Consider

A home is the largest purchase most people will ever make. But buying is not for everyone—for some, renting may be a better or more affordable choice. Compared to Generation X and baby boomers, homeownership among millennials—those born between 1981 and 1997—is down 8% from similar points in their lives. And two-thirds of millennial homeowners are already expressing some regret about buying their current homes.

It’s not just younger people who are weighing their options. People of all ages revisit the topic of home ownership, from trading up from a first home to a second home to purchasing a vacation home or downsizing into retirement.

Whatever your stage of life, here are four financial points to consider when deciding whether to rent or buy.

1. What’s your timeframe? The longer this house will be your home or vacation home, the more financial sense it makes to buy. If you don’t see yourself keeping your new house for at least three years, it likely won’t appreciate enough to justify the transaction costs of buying and selling.

2. What’s the true cost of ownership? You have to account for more than just your principal and interest payments on your mortgage; there are property taxes and insurance to consider. Plus, we recommend budgeting around 1% of the home’s total value every year for maintenance.

If you’re wondering if you can afford a house, add up the monthly payments for principal, interest, taxes and insurance (and if this is a second home, add in these costs for your first home, too), then divide by your monthly gross income. If your total housing costs are greater than 28% of your income, you may be stretched too thin—renting (or buying a less expensive home) is the safer call.

3. Will you get tax savings? A mortgage interest deduction is often touted as a reason to buy. But keep in mind: Before tax laws changed in late 2017, homeowners could deduct interest on mortgages worth up to $1,000,000. Now that’s down to $750,000. What’s more, you must itemize your taxes to take advantage of any mortgage interest deductions. Because of those same 2017 tax-law changes, many owners may find they don’t see any benefit because of the increase in the standard deduction to $12,000 for single filers and to $24,000 for spouses filing jointly.

4. What about opportunity costs? This question is one you may not think to ask yourself, but it’s how financial planners analyze decisions like these: If you invest your down payment in the stock market instead of a house, what rate of return could you reasonably expect? Or what if you simply deposit that money in a high-yielding savings account? Likewise, if you could rent a similar property for less per month than your total monthly costs of ownership, how much would you gain by investing the excess savings every month?

Renting and buying can each be a smart money move—your income and savings, plus your progress towards a safe and secure retirement, are important factors. Click here for a rent-versus-buy calculator you can try on your own.

Of course, whether to rent or buy isn’t just a financial decision. Some people value the flexibility that comes with renting. Others feel more connected to their community or secure when they own their home. We’ve focused on the financial side of the rent-versus-buy conversation, but don’t discount the emotional aspects of this decision.

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Looking Ahead to Consumer Credit, Job Openings and Retail Sales

Next week’s slate of economic data is relatively light, though we’ll still get useful reads on consumer credit and sentiment, small-business-owners’ confidence, job openings, inflation and retail sales.

If you’d like to learn more about our tactical or fundamental investment strategies, please contact Steve Johnson at 844-587-7393 or info@bravercapital.com.

Please note: This update was prepared on Friday, September 6, 2019, prior to the market’s close.

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