What’s On Tap: No Storms on Economic Horizon

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  • Hurricane Florence and Investment Perspective

  • Ten Years Later: Stock Markets Near All-Time High

  • Looking Ahead to Manufacturing and Housing Data

While the weather made headlines Friday as Hurricane Florence made landfall in the Carolinas, there was little in the way of market-moving drama this week other than a rebound in U.S. stock markets to within inches of the record highs set last month. Until today, when talk of $200 billion in tariffs on Chinese goods was revived, trade tensions had been at a low ebb, and with earnings reports for the as-yet unfinished third quarter about a month away, Wall Street had been treading water. Friday saw a bit more volatility added to the mix. 

Economic data continues to reflect a healthy consumer who is spending more but keeping that spending within their means. Interest rates are, and will remain, borrower-friendly even if the Federal Reserve policymakers raise the fed funds rate by 0.25% on September 26, as we think they will. And while Hurricane Florence may bring short-term economic setbacks locally, we fully expect the economy will pick up wherever it left off and suffer no permanent paralysis from the storm’s destructive forces.  

For the year through Thursday, the Dow Jones Industrial Average has returned 7.5%, while the broader S&P 500 has gained 10.1%. The MSCI EAFE index, a measure of developed international stock markets, is down 3.8%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has climbed to 3.40% from 2.71% at 2017’s end. On a total return basis, the U.S. bond market has declined 1.4% for the year.

Hurricane Florence and Investment Perspective

Hurricane Florence will deal a big blow to the Carolinas and elsewhere in the region, and the human cost and reconstruction expenses (with luck, low) will come to be known in the days and weeks ahead. Our thoughts and prayers are with everyone affected, and we hope that you and your loved ones are safe on high ground. We’re rooting for you.

If investors are looking for silver linings, it’s that reconstruction will generate infrastructure and construction jobs for years to come. From an investment perspective, we’ve suffered enough natural disaster misfortune over the years to surmise that we will see the hurricane’s impact on weekly jobs creation and jobless-claim data at a local and perhaps regional (but not national) level. However, this will likely be followed by a rebound to at least the standard trend lines. Car sales are likely to see a boost as drivers replace storm-damaged vehicles. On a broader basis, third-quarter economic growth will likely be slowed a bit in the hurricane’s wake. 

Ten Years Later: Stock Markets Near All-Time High

Saturday marks the 10-year anniversary of what many consider the catalyst for the bear market that accompanied the Great Recession—the bankruptcy of Wall Street banking powerhouse Lehman Bros. That bankruptcy filing led to a lack of confidence in financial markets worldwide. Combined with mortgage-debt woes, this set off a cascading trail of distresses that led to the Fed’s and the government’s historic quantitative easing and bailout programs.

But let’s go back a minute. On September 15, 2008, as Lehman Bros. was in federal court filing the largest bankruptcy in U.S. history, the S&P 500 index dropped 4.7%. Two days later, another 4.7% decline. By month’s end, the S&P had lost 8.9%. The market dropped another 16.8% in October, followed by an additional 7.2% fall in November. And it kept getting worse before it would get better.

Fast-forward to today and stock markets are up by multiples. Since the end of August 2008, the S&P 500 has returned 180%. But since the end of September 2008, just one month later, the S&P 500 has returned 208%! How is that possible? Well, after that big September decline, we start from a lower base. Thus, the return is higher. And it’s going to get higher still as the calendar rolls ahead and the even more volatile months of late 2008 and early 2009 become the denominators in the equation. 

The siren song of double-digit returns can be alluring, even for experienced investors. Not since September 2000, 18 years ago, have the one-, three-, five- and 10-year returns for the S&P 500 all consistently been in the double digits at the same time. And barring a market catastrophe, the numbers are going to get even more “bullish” as this year draws to a close.

Note: Chart shows rolling total returns for the S&P 500 index for the periods listed on a monthly basis from 1/31/88 through 8/31/18. Multi-year returns are annualized. Sources: S&P Dow Jones, Braver Capital Management.

Note: Chart shows rolling total returns for the S&P 500 index for the periods listed on a monthly basis from 1/31/88 through 8/31/18. Multi-year returns are annualized. Sources: S&P Dow Jones, Braver Capital Management.

We bring this up because some investors will look at the stock market’s returns, which dwarf those of the bond market, and with their hindsight bias working overtime, they may conclude that they should just go all-in and put their entire portfolio into the stock market.

For most investors, that would be a bad idea. While the numbers tell a tale of immense wealth-making over the last decade, moments like these are ephemeral. As the chart above shows, these calculations bounce around pretty dramatically.

This is gut-check time. The stock markets are near their recent all-time highs. The “look-back” numbers are all in double-digits. While we’re not calling the top, nor would we ever try to, every individual investor needs to consider whether their portfolio is currently at a risk level that they can withstand.

You’ll be hearing a lot more about the remarkable stock market over the next few days. We suggest you keep a modicum of skepticism handy in case sentiment becomes too bullish. 

Looking Ahead to Manufacturing and Housing Data

Next week, we’ll see further updates on the state of the manufacturing and service sectors of our economy (covering the economic activity and employment landscape as a whole), housing (including builders’ confidence, new construction, permits and existing home sales) and overall leading economic indicators.

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, September 14, 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.

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