Monthly Strategy Review: Braver Capital November 2018 Update

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  • S&P Gains 1.8% Despite Stock Market Turbulence

  • Sector Analysis: Tech Stocks Fall as Health Care Gains

  • Investment-Grade Bonds Advance; High-Yield Bonds Decline

  • Investment Strategy Review

S&P Gains 1.8% Despite Stock Market Turbulence

To put it mildly, November was a turbulent month for investors. The S&P 500 index gained nearly 4% in the first week of the month before falling 6% over the next two weeks. On November 23, the S&P 500 entered correction territory—down 10.2% from its September high. Large-cap stocks then rallied 5% in the final week of the month as worries over interest-rate hikes and U.S.-China trade relations decreased.

For all of the stock market swings, the S&P 500 gained 1.8% in November. In this light, the month was a microcosm for the entire year: Despite recurring declines and subsequent recoveries, prices have kept within a narrow band and, ultimately, investors have gained ground. The S&P 500 is up 3.2% (5.1% if we include dividends) year-to-date.

In fact, if you consider the difference between the S&P 500’s low and high for the past 11 months, 2018’s market action ranks as the seventh narrowest trading range for the index over the past 90 years. At just 13.6%, the year’s high-low range is well below the 33.0% average.

Stocks in developed foreign markets moved in near lockstep with our own last month, but in the end returns were muted: The MSCI EAFE index declined fractionally, off 0.1% in November. Foreign stocks have trailed U.S. shares by a wide margin this year, with the MSCI EAFE index down 9.4% in 2018.

Meantime, emerging markets bounced higher in November, finding relief from a pullback in the U.S. dollar. The MSCI Emerging Markets Index returned 4.1% during the month, but is still down 12.2% for the year.

Sector Analysis: Tech Stocks Fall as Health Care Gains

Among U.S. sectors, those with the strongest positive momentum through October fell the hardest in November as the rotation from cyclicals to defensive groups continued. Technology was the worst performing sector, falling 1.9%. High-flying tech stocks were hit with negative headlines and increasing investor disenchantment over slowing growth and increasing regulation.

Health care stocks exhibited their defensive capabilities, gaining 7.1% last month. The sector is up 16.5% and has displaced technology as the year’s sector leader.

Income-oriented stocks also did well in November. Real estate shares rose 5.6% as interest rates fell. The utilities sector outperformed the broad market in part due to investors bidding up stable, defensive stocks with above-market dividend yields.

Investment-Grade Bonds Advance; High-Yield Bonds Decline

Investors went for quality in the bond market in November; highly rated bonds gained ground while non-investment-grade bonds dropped.

The Bloomberg Barclays U.S. Aggregate Bond Index—a measure of high-quality U.S. bonds that includes Treasury and corporate bonds—gained 0.6% during the month, but is still off 1.8% for the year. Treasury bonds, the highest quality portion of the bond market, did even better. Stock market turbulence increased demand for safe-haven assets and the Bloomberg Barclays U.S. Treasury Index gained 0.9% in November.

High-yield corporate bonds, or “junk” bonds, were hampered by weakness in the energy sector. The Bloomberg Barclays U.S. Corporate High-Yield Index fell 0.9% during the month, but is still in positive territory for the year, up 0.1%.

Investment Strategy Review

Dividend Income: While it is our intent to make money on every one of our stock picks, the truth is that not every choice will work out. Recent stock market volatility gave us an opportunity to harvest losses in two positions in the technology and energy sectors. We used the proceeds to add to positions in a leading home improvement retailer, an industrial company with an extensive power management business and our lone tobacco holding. The portfolio continues to be overweight technology, financials and consumer staples stocks compared to our broad market benchmark. The portfolio’s current dividend yield is approximately 2.5%.

Global Tactical Balanced: In early December, the model driving the portfolio signaled several trades. Two of the trades reduced risk in the portfolio as we swapped a technology sector ETF for a utilities ETF and sold commodities to buy U.S. convertible bonds. Another trade trimmed our international bond position to purchase a stake in a New Zealand stock ETF. The allocation to equities now stands at 35%, with 30% of the overall portfolio invested in U.S. stocks. The strategy also holds mortgage and equity REITs and a U.S. Treasury bond ETF. The remaining 2% of the portfolio is in cash.

Tactical Balanced: There were no trades in November. The portfolio is currently invested 50% in an S&P 500-tracking ETF. The other half is split between a broad U.S. bond market ETF and cash.

Tactical High Income: The trading system signaled a buy in the first week of December and the portfolio is currently fully invested. The Bloomberg Barclays U.S. Corporate High Yield index fell 1.6% in October and, as mentioned above, was down 0.9% in November. However, the high-yield market strengthened at the end of last month on comments from Federal Reserve Chair Jerome Powell suggesting that the central bank was nearing the end of its program of quarterly rate hikes.

Tactical Opportunity: After several trades in November and early December, this portfolio is now tilted toward small-cap and mid-cap value stocks. We also established positions in the financial and consumer discretionary sectors at the end of November. Just 5% of the portfolio is invested in cash.

Tactical Sector Rotation: The decline of semiconductor and internet stocks in November prompted the sale of a technology sector ETF in early December in this sector-rotation strategy. We bought a financial sector ETF with the proceeds. The portfolio continues to hold sectors showing the largest gains this year—consumer discretionary and health care among them.

All Braver investment 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.

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