Focus Still on Fed Interest-Rate Decision

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  • Markets Await Fed’s Next Interest-Rate Move

  • Global Economic Growth Weakens

  • Braver Capital’s Market Outlook—Challenging Times Ahead?

  • Braver Capital’s Quarterly Webinar: Tariffs, Rate Cuts and Slowing Profits

  • Reverse Mortgages—Separating Myth From Reality

  • Looking Ahead to the Fed Decision and Economic Data

Markets have reentered record territory and we think that the current environment offers opportunities for investors like us.

This week, we saw the S&P 500 index hit a new stock market high on Wednesday—its 219th since March 2013—even as companies reported mixed results and economic growth continued to weaken overseas.

New records don’t mean that we are getting complacent or ignoring current events. From D.C. fireworks (no doubt both sides of the aisles were disappointed by Mueller’s testimony; from an investment standpoint, it was a non-event) to the world stage (this week’s induction of staunch Brexit proponent Boris Johnson as the U.K.’s new prime minister and ongoing protests in Hong Kong, to name two flashpoints), caution makes sense.

Next week, the focus shifts to another kind of caution: Whether Federal Reserve policymakers will cut the fed funds rate by 0.25%.

For the year through Thursday, the Dow Jones Industrial Average and the broader S&P 500 index have returned 17.9% and 21.2%, respectively. The MSCI EAFE index, a measure of developed international stock markets, is up 13.9%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has declined to 2.54% from 3.28% at 2018’s end. On a total return basis, the U.S. bond market has gained 6.1% for the year.

Markets Await Fed’s Next Interest-Rate Move

This morning’s estimate of 2.1% economic growth in the second quarter shows the U.S. continues to be on a slow-growth-not-no-growth course. Yet, as of Thursday, the “market,” as measured by fed funds futures, expects the central bank to cut rates next week. Futures indicate an 80% chance of a 0.25% interest-rate cut and a 20% likelihood of the Fed lowering the fed funds rate by 0.50%. Of paramount concern to policymakers: Slowing global growth and uncertainty around President Trump’s trade policies.

We see nothing in the fundamentals that suggests a July rate cut is absolutely necessary. The “Misery Index” (a measure developed in the 1970s that adds together the unemployment rate and the inflation rate) provides a quick snapshot of whether the Fed is achieving its goal of supporting full employment and stable prices. The current reading of 5.6 is the lowest since 1966—so mission accomplished… for now.

Note: The Misery Index is calculated by adding unemployment rate and inflation (year-over-year change in core Consumer Price Index). Chart shows monthly values from January 1958 through May 2019.  Source: Bureau of Labor Statistics.

Note: The Misery Index is calculated by adding unemployment rate and inflation (year-over-year change in core Consumer Price Index). Chart shows monthly values from January 1958 through May 2019.

Source: Bureau of Labor Statistics.

If the Fed makes a cut next week, it would be a preemptive move toward safeguarding economic stability. Beyond that, Chair Jay Powell has expressed concerns about slow global growth, tariffs and weaker manufacturing and housing data. But it would be uncharacteristic for policymakers to lower rates based on a guesswork forecast of conditions worsening from here. Such an anticipatory move could harm confidence in the central bank’s decision-making.

Also, it’s wise to remember that not so long ago many forecasters were predicting multiple Fed rate hikes this year. For example, Vanguard announced last October that it was counting on three increases over the coming 12 months.

Global Economic Growth Weakens Further

Last week it was reported that China’s economy only grew at a 6.2% annual pace—its slowest growth rate in 27 years. (We would be lucky to have such “weakness” in the U.S.) Another way to frame the news: There’s still expansion to come in China, even if it’s slowed in recent years.

Turning to Europe, this week it was revealed Germany had its worst monthly manufacturing output in seven years in July. The European Central Bank stood pat on rates but talked up its willingness to provide more stimulus to combat a deteriorating economic outlook.

Wednesday’s earnings miss from Caterpillar—a reasonably reliable bellwether of global economic activity since you can’t farm, mine or build a road, bridge or sewer without their earth movers—reflects our view about our economy’s relative strength versus the global one’s: North American sales of machinery, energy and transportation were up 12% while Asia/Pacific sales fell 8%.

We believe the second half of this year will present a more challenging investment landscape than we’ve seen in the recent past.

Braver Capital’s Market Outlook—Challenging Times Ahead?

The current bull market is now one of the longest in U.S. history, and stocks have continued to hit new highs just this week. But we believe the second half of this year will present a more challenging investment landscape than we’ve seen in the recent past. For more information about the trends we’re seeing—including opportunities for gains both here and abroad—please check out this quarter’s Braver Capital Management Market Outlook.

Braver Capital’s Quarterly Webinar: Tariffs, Rate Cuts and Slowing Profits

We’re looking forward to hosting our quarterly webinar next week, Tariffs, Rate Cuts and Slowing Profits. Portfolio Manager Steve Johnson, Chief Investment Strategist Charlie Toole and Equity Research Analyst Kate Austin will offer their insights on the turbulent (and record-setting) first half of 2019. The event goes live on Tuesday, July 30 at 4:00 p.m., EST.

Register for Tariffs, Rate Cuts and Slowing Profits—and if you can’t make it on Tuesday, an on-demand replay will be available following the event. We hope you can join us!

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Reverse Mortgages—Separating Myth from Reality

Reverse mortgages get quite a bit of coverage from the media—much of it negative, and not without reason. But they can be a useful tool in certain financial situations, so let’s separate the myths from the facts.

What’s a reverse mortgage? Simply put, it’s a loan. Unlike most loans, when you take out a reverse mortgage you don’t pay it back month by month; instead, your loan is repaid with the proceeds from the sale of your home sometime in the future.

A homeowner must be at least 62 years old and have a large amount of equity in their home to take out a reverse mortgage. Proceeds from the reverse mortgage can be doled out as a lump sum, in the form of fixed monthly payments or held in reserve as a line of credit. 

Many consumers have some misconceptions about what’s involved in taking out a reverse mortgage. Here are four common myths: 

Myth #1: The bank receives the title to the home as part of the reverse mortgage.

Reality: False. The homeowner keeps the title of the home in their name.

Myth #2: Your heirs will not inherit your home.

Reality: If you have an outstanding reverse mortgage on your home when you pass, your estate will still inherit your home. At this point, the outstanding loan on the property must be repaid. Importantly, though, a reverse mortgage is a “non-recourse” loan, which limits how much your heirs owe:

  • If your heirs decide to keep the home, they will have to pay off the loan. But they can never owe more than the home is worth.

  • If the house is sold and the sale doesn’t cover the loan balance, the difference is paid by the Federal Housing Administration (FHA). This means that even if the house sells for less than the loan amount, your heirs won’t owe anything.

  • If the property is sold for an amount in excess of the loan balance, the remaining funds go to your heirs.

Myth #3: You will be forced out of your home if you don’t pay back the reverse mortgage.

Reality: A reverse mortgage never needs to be paid back by the borrower. If you take out a reverse mortgage, you can remain in the property for the rest of your life without making any payments on the loan. However, you will still owe property taxes and homeowner’s insurance. If those payments are missed, you could face a foreclosure.

 Myth #4: A reverse-mortgage line of credit and home-equity line of credit are the same thing.

Reality: While both are methods to tap into the equity of a home, there are some important differences. A home equity loan needs to be repaid, typically over a five- or 10-year period. Reverse mortgage loans do not. But reverse mortgages come with much steeper upfront closing costs than home equity loans.

 It’s worth repeating that reverse mortgages are an option that can make sense in certain financial situations and can be the wrong choice in others. Be sure to seek expert advice if you have questions about whether a reverse mortgage is right for you or a loved one.

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Looking Ahead to the Fed Decision and Economic Data

The Fed is next week’s main event, but a plethora of other important indicators will also be released: Personal income, spending, savings and consumer confidence data; inflation gauges; ADP private sector employment and the broader nonfarm payrolls jobs report; construction spending, car sales and more. 

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, July 26, 2019, 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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