Monthly Strategy Review Braver Capital: May 2019 Update


Market Analysis

After hitting an all-time high at the end of April, stocks skidded in May with the S&P 500 index falling 6.6%. What happened?

Sellers overwhelmed buyers as investors increasingly focused on concerns relating to familiar themes. Chief among them were U.S.-China trade talks, Brexit, Iran, an inverted yield curve and domestic political grandstanding.

The result: Stock markets tumbled around the globe, with Asian markets particularly hard-hit—China fell 7.4% and Hong Kong dropped 9.4%. Meanwhile, Germany’s market was off 5.0% and London’s declined 3.5%. Despite these pullbacks, gains earned earlier in 2019 mean that most markets are still up year-to-date.

In the U.S., small-cap stocks fell harder than large-caps, off 8.9%. Ten of the 11 S&P sectors declined in value, though defensive sectors, such as utilities and health care, held up relatively well. Real estate was the lone sector in the black with a gain of 1.2%. Cyclical sectors, such as energy, materials and technology, were down between 8.2% and 11.1%. 

High-quality U.S. bonds remain the flight-to-safety asset of choice. The Bloomberg Barclays U.S. Government Bond index gained 2.3% in May. As prices rose, yields of intermediate and long maturity bonds declined—the 10-year Treasury yield ended the month at 2.14%. At the other end of the fixed-income risk spectrum, high-yield, or “junk,” bond prices fell 1.2%.

Investment Strategy Review

The Dividend Income investment team took advantage of May’s volatility—eliminating two holdings and trimming positions in a few technology stocks. Proceeds from these sales were added to existing holdings in the health care and financial sectors. The portfolio’s current 2.5% dividend yield compares favorably to the S&P 500 index’s 1.9% yield.

Our Global Tactical Balanced strategy signaled a significant reduction of risk at the start of June. Positions in an S&P 500 ETF and the technology sector were sold, as were the China and Brazil ETFs. Various bond and REIT ETFs were purchased in their place. Currently, 10% of the portfolio is invested in equities, about 20% is in real estate and the remaining 70% or so is invested in bonds.

We sold a third of the S&P 500 ETF position in the Tactical Balanced portfolio in early June (25% of the portfolio). Half of the portfolio remains invested in the S&P 500 ETF, while the other half is evenly split between high-quality bonds and cash.

In the first few days of June, one of the two sell signals in our Tactical High Income strategy was triggered as high-yield bond prices fell. The portfolio is now nearly evenly divided, with 52% in cash and 48% in high-yield bond ETFs.

Our Tactical Opportunity strategy was active in May. A month ago, the portfolio was fully invested in stocks, so the net result of the most recent trades has been, as you might expect, to reduce the stock exposure while increasing the allocations to bonds and cash. The portfolio currently has a 45% allocation to cash, 35% in equity ETFs and 20% in a U.S. Treasury ETF.

In June, we introduced changes to the Tactical Equity Sector Rotation strategy, which now holds up to six (down from eight) sectors and industries at a time. The strategy can also own a broad S&P 500 ETF and has the ability to raise cash during market declines. We believe these changes will improve growth potential by increasing the portfolio’s concentration in sectors showing favorable momentum while also lowering costs. During May, the strategy called for the sale of stocks in the consumer discretionary, industrial, technology and semiconductor sectors. These were replaced by a position in an S&P 500 ETF. The portfolio also currently includes narrower holdings in the consumer staples, homebuilder, real estate and utilities sectors.

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. References to current sector positioning are for informational purposes only and are not to be construed as statements of the current, past or future profitably of the particular positioning. Data and statistics contained herein are obtained from what we believe to be reliable sources; however, their accuracy, completeness, or reliability cannot be guaranteed. 

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