What’s on Tap: Deck the Halls With Stocks on Sale

Stocks on Sale.png
  • Stocks Slump in Context: Selloffs Offer Wealth-Building Opportunities

  • Fed Continues to See Growth; Raises Benchmark Fed Funds Rate

  • Bond Market Rally as Investors Turn to U.S. Treasurys

  • Looking Ahead to Consumer Confidence, Manufacturing and Home Prices

A looming government shutdown and the Federal Reserve’s interest rate-hike weighed on Wall Street this week, sending markets deeper into the red as 2018 wanes. With the end of this bull market potentially at hand, we think it’s important to remember that, despite this year’s lumps of market coal, we’ve enjoyed nearly a decade’s worth of outsized gains and the seeds of the next bull market are being planted during the current downturn.

After a difficult 2018, we don’t expect to 2019 to be any easier on investors’ collective psyches. But down years are par for any investment course, and selloffs often wrap wealth-building opportunities in a bow for disciplined investors to snap up.

For the year through Thursday, the Dow Jones Industrial Average has declined 5.4%, while the broader S&P 500 has dropped 5.9%. The MSCI EAFE index, a measure of developed international stock markets, is down 14.2%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has climbed to 3.38% from 2.71% at 2017’s end. On a total return basis, the U.S. bond market is nearly flat, down 0.4% for the year.

Stock Slump in Context: Selloffs Offer Wealth-Building Opportunities

The fourth-quarter declines from September’s record highs sting, and seem amplified coming on the heels of a nearly 10-year bull-market run. But taken as a whole, 2018 hasn’t been half as bad as it may feel. Vanguard’s 500 Index fund—a common proxy for the stock market—is only down 6.1% for the year. So why does it feel like it should somehow be a lot worse? Because the fund (and the S&P 500 benchmark it tracks) has experienced two separate corrections—declines of 10% or more—this year, and is poised to end the year on a negative note; its first calendar-year loss since 2008.

Having declined 15.4% from its September 20, 2018 apex, 500 Index’s fall has been particularly speedy, taking place over just 65 weekdays (holidays included). We looked back to find similar descents from market highs and, with the exception of Black Monday in 1987 (when the stock market fell 20% in one day), the current drop ranks among the top five most rapid over the past several decades. Even though this index fund is, as noted, down just 6.1% for the year, the speed of the stock market’s fall from the peak has ratcheted investor anxiety to unreasonable levels. 

It’s never easy to endure a slide like this, yet, as investors, we must accept that bear markets are an inevitable reality when it comes to our investments—whether we own stocks, bonds, real estate or bitcoin.

Perhaps the time has come to put this “longest stock bull market” talk to rest. After all, it’s in these environments—bear markets—where the best opportunities for investors emerge. As we said last week: Why do investors shy away from buying when stocks go on sale, but are eager to keep buying when stocks are at or near all-time highs?

Fed Continues to See Growth; Raises Benchmark Fed Funds Rate

 The Wall Street Journal put it well yesterday afternoon when they wrote that investors and Federal Reserve policymakers are out of sync. While traders cower in premature recession fear, the Fed affirmed on Wednesday that it believes the economy remains on a steady, slow-growth-not-no-growth course by raising the benchmark fed funds rate by 0.25% to a 2.25%–2.50% range. At the same time, they said that there are likely to be fewer interest-rate increases in 2019 than previously forecast.

While this shouldn’t have been a surprise to anyone, stocks sold off sharply on the news. The predominant concern among bears is that the Fed board is making a mistake, and in continuing to raise interest rates, they may go too far, pushing the economy into a recession. That’s one argument.

The economic data on which the Federal Reserve decided to act is telling a different tale than the one Wall Street is reacting to. Yes, Powell explained, growth is likely to slow next year from the 3.4% pace of economic expansion in the third quarter—the Fed estimates 2.3% growth in 2019. That’s still growth in our book. In fact, it’s the same pace of growth we saw in 2017 and better than that experienced in 2016.

Bonds in the Black as Investors Turn to U.S. Treasurys

 While the stock market was falling, fixed-income investors had reason to cheer as bond prices continued to rise amid the volatility. When investors are nervous, they turn to the safety of U.S. Treasury bonds.

After being in the red all of this year, Treasury bonds (measured by the Bloomberg Barclays U.S. Treasury index) finally entered positive territory this week. The broader Bloomberg Barclays U.S. Aggregate Bond index, which includes corporate and mortgage-backed bonds along with Treasurys, is enjoying a late-year rebound as well, and is now just fractionally down in 2018.

As with stocks, it is also true that it’s impossible to time the bond markets. Investors who stuck with their allocations to bonds and bond funds are now being rewarded for their patience and perseverance.

We’ve noted many times that investors shouldn’t fear rising interest rates because, while they can lead to lower bond prices, they also generate larger income distributions. The past month has been a reminder that bonds can effectively diversify and buffer portfolios as well, especially during periods of stock market distress.

Looking Ahead to Consumer Confidence, Manufacturing and Home Prices

Next week, markets and the Braver Capital Management offices will close at 1 p.m. Monday and remain shuttered Tuesday in observance of Christmas Day. We’ll be back at our desks ready to help you Wednesday morning. We’ll also be looking over reports on consumer confidence, manufacturing, home prices and new-home sales to round out our view on what to expect heading into 2019.

From the Braver family to yours—happy holidays!

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, December 20, 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.