Calmer Stock Markets Climbing Again

Calmer Stock Markets Climbing Again.png
  • Trade-War Talk Quiets; ECB Renews Bond Buybacks

  • Time Again for Value Stocks to Shine?

  • Student Loans Demystified: FAFSA and Federal, Private Funding

  • Looking Ahead to Fed Meeting and Housing-Related Data

Investor optimism rebounded over the past week, mainly on no new trade-war rhetoric and ongoing hopes that more stimulus is on the way from Federal Reserve policymakers and other central bankers.

A policy move is likely to happen here at home: When coupled with weak global economic data, last Friday’s jobs report was low enough to further solidify investors’ expectations for an interest-rate cut when the Fed meets next week. Overall, our economy remains on a slow-growth path.

Through Thursday, the Dow Jones Industrial Average and broader S&P 500 index have returned 18.6% and 21.8%, respectively. The MSCI EAFE index, a measure of developed international stock markets, is up 13.5%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has fallen to 2.37% from 3.28% at 2018’s end. On a total return basis, the U.S. bond market has gained 7.7% for the year.

Trade-War Talk Quiets; ECB Renews Bond Buybacks

Trade-war concerns have been muted this week, and China’s announcement Friday that it does not plan to introduce new tariffs on American agricultural products is another step back from bellicosity. With the two world powers ratcheting down their rhetoric, global markets have been buoyed by investors’ and traders’ anticipation that more economic stimulus is on the way.

The European Central Bank didn’t disappoint with the Thursday announcement that it would renew its bond buyback stimulus efforts, as well as cut its overnight lending rate (called the “deposit facility” or “deposit rate”) from negative 0.40% to negative 0.50%. All in all, these steps are designed to bolster lending and economic growth, which have been anemic despite prior similar moves.

In our view, these slim cuts may be enough to stave off outright European recession over the next quarter or two, but they are unlikely to shock the continent’s flat-lining economies back into strong growth. The prescription for that remains a mystery at this point, particularly with the uncertainty around Brexit paralyzing some economic activity.

Here at home, small business confidence and job openings remain extremely elevated, which is a sign that our slow-growth economy is still minting money and jobs and the kind of upbeat sentiment that comes with doing so.

We are, however, keeping a close eye on measures of business confidence and investment, especially as we head into autumn and companies solidify their plans for 2020. Tariffs and trade-war concerns are weighing on employers’ ability to plan, invest and budget. If business leaders prove pessimistic, those concerns could hurt hiring and even trigger workforce cutbacks in the months to come.

Time Again for Value Stocks to Shine?

The rally in the stock markets this past week has sent both the Dow and S&P 500 indexes to within fractions of the all-time highs they set in July.

Some pundits have taken the opportunity to declare that this latest rally marks a turning point in market trends, with the protracted dominance of “growth” stocks now being overtaken by those deemed “value” stocks. It’s finally time, they say, to sell your growth stocks and growth funds (think the FAANGs—Facebook, Amazon, Apple, Netflix and Google/Alphabet—for instance) and buy bank or energy stocks or, dare we say it, manufacturing stocks.

Journey back all of eight trading days to the end of August, and you’ll see that, in most cases, returns for growth-focused funds have far outpaced value-focused funds for the year. Vanguard’s Growth Index had produced a 24.5% year-to-date gain by the end of last month, far, far ahead of its Value Index’s 12.4% return, for example.

But this month, the story’s been different, with value-focused funds outpacing growth. Vanguard Value Index is up 4.0% for the month, while Vanguard Growth Index is up just 1.7%. 

Have investors substantially changed their minds this September? We don’t think so. Since February 2009, when the Financial Crisis-era bear market ended, value and growth styles have traded places many, many times. Could we see a few months or even more where value outperforms growth? Of course. Could it flip back the other way next week? Absolutely.

We’re not going to try to predict which way things will go next week or even next year. We’ll remain skeptical of claims that major trends are changing based on two weeks of trading. In the meantime, we'll be using our models and our math to monitor the market’s signals and move when the market tells us to, not the media.

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Student Loans Demystified: FAFSA and Federal Private Funding

Now that we are in September, it’s back to the books for students—which makes it a good time to study up on or review the student-loan process for those paying for their educations.

Here’s what you need to know.

FAFSA

The Free Application for Federal Student Aid (FAFSA) is the starting point most aid programs use to determine eligibility, and that includes states and colleges as well as the federal government. Completing it will give you a much better picture of the aid options available to you or your higher-ed-bound student.

We recommend that all of our clients with college students in their household fill out the FAFSA as early as possible, as many grants, loans and scholarships are granted on a first-come, first-served basis. The earliest you can file the FAFSA for the following school year is October 1 (that is, October 2019 for a student enrolling in September 2020).

Once your school receives the FAFSA, you (or your child or grandchild) will be sent an award letter from the financial aid office summarizing any scholarships and grants that you qualify for, as well as your eligibility for federal loans. 

Federal Loans

There are three types of federal loans: Direct subsidized loans, direct unsubsidized loans and direct PLUS loans. Direct loans are taken out by students themselves. Direct subsidized loans don’t accrue interest while the student is in school. However, these loans are only available to financially qualified undergraduate students.

Direct unsubsidized loans have three key differences from direct subsidized loans: They are not need-based, interest does accrue while you’re in school and they can also be used to cover the costs of graduate school. 

PLUS loans are available to parents of students or graduate students. However, they begin accruing interest as soon as they’re issued and typically carry higher interest rates than direct loans. For that reason, PLUS loans are our least favorite of the three options available.

Private Loans

Once you’ve exhausted the list of all scholarships, grants and federal loans that are available to you or your student, private loans can help fill any additional gaps. 

Private loans are offered by banks and other institutions, like Sallie Mae or your university. They often come with higher interest rates, are not eligible for loan forgiveness, do not qualify for flexible repayment options and payments may start while the student is still in school. We recommend you use them only after all federal aid is spent.

But private loans do have their place. Federal loan limits are capped anywhere from $5,500 to $12,500 for undergraduates. Private loans often have a higher borrowing limit. 

We have much more to say about student loans, and we’re sure you have much more to ask. If you’d like to learn more about 529 plans and other college savings plans that could help reduce or eliminate the need for loans in the first place, we encourage you to read our parent company’s special report on the subject, Smart Ways to Save (and Pay) for Education, or tune in to the “Get Smart: Saving and Paying for College” episode of The Adviser You Can Talk To Podcast.

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Looking Ahead to Fed Meeting and Housing-Related Data

Next week, the Fed will again take center stage on Wednesday, with the Federal Open Market Committee meeting and rate announcement at 2:00 p.m. EDT, followed by a press conference with Chair Jay Powell. While that news (and the market’s reaction to it) will likely dominate the week, we’ll also get regional manufacturing activity gauges, housing-related data and reports (homebuilders’ confidence, housing starts, building permits, existing home sales) and leading economic indicators.

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 13, 2019, prior to the market’s close.

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