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The Brave Report: Market Commentary for Q1 2023

Click here for the .pdf version of this report: The Brave Report-2023Q1

Over the past few months, I have paused the publication of the Brave Report in an attempt to fine-tune the proper frequency and format for the report moving forward.  I have spoken with clients and the consensus seems to be that the format works well but publishing on a quarterly basis (rather than monthly) along with one-off pieces when specific events arise is the preferred frequency.  If at any time between publications you have a question about a specific topic and how it impacts the markets, feel free to reach out directly.

Banking crisis, inflation and recession… These are the buzzwords for the past quarter.  Inflation and the fear of recession have been looming over the markets for well over a year now.  Rates have risen drastically to keep inflation in check and many fear that the only way to get it back to “normal” levels is to slow the economy into a recession.  Markets are now trying to handicap how deep and long-lasting any economic damage will be.  Throw on top of this the failure of a few banks and the fears of a repeat of 2008 come streaming back.  However, even with all of this negativity, the markets were able to rally throughout the 1st quarter. They had been sold off pretty heavily last year so they definitely had some room to jump but this resilience in the face of a lot of uncertainty should be looked at as a positive.  For the remainder of the year, I expect this push and pull to continue. Range-bound volatility will be the norm until we can get some more clarity on the strength or weakness of the economy.

Market Overview

Following what was the worst year in the markets since the financial crisis, the markets bounced back in the first quarter of 2023. The bounce, however, was not market-wide as there was a large dispersion between the three indices. During the quarter, the S&P 500 rallied 7% and the NASDAQ rose just shy of 17%. The Dow Industrial Average only advanced slightly, gaining around 0.3%.  This was a reversal of how things ended last year when the tech-heavy NASDAQ was the big underperformer. During the quarter we saw a rush into larger, profitable technology names as cost-cutting within the sector made headlines. These names emerged as the ones that are expected to be able to withstand the elevated rate environment and any subsequent economic downturn. They were also some of the names most beaten up over the previous 12 months.

On the fixed income side of the equation we are still seeing an inverted yield curve, with rates on the short end of the curve remaining elevated above their long-dated counterparts.  We did see rates come down a bit during the month of March as the Fed laid out its projections for future rate hikes and inflation continued to drop. However, if we look back a year, the rate on the 10-year is still 1.25% higher than a year ago.  The Fed, has signaled an end to their rate increases but there are still a lot of moving parts in the equation.  If inflation remains at elevated levels, we could see rates stay high for quite some time. On the opposite side, if economic data starts to signal an imminent recession, we could see rates soften.

SVB

The recent failure of Silicone Valley Bank, along with some other smaller institutions has brought memories of 2008 back to the forefront.  Before I dive into it, I want to make clear that what we have seen in the banking sector over the past month is very different than what we experienced in 2008.  The regulatory environment is much different, and our banking system is much better capitalized than it was back then.  With that said, there will be some long-lasting impacts from this recent turmoil.

First, what happened to SVB?  SVB was a unique player in the banking industry, catering primarily to venture capital firms and venture capital-backed companies and founders.  SVB was able to leverage these relationships to be a one-stop shop for the venture community.  These types of deposits were not very “sticky” as companies would routinely need access to their capital as they spent money to operate their companies.  They also had one of the largest non-FDIC insured deposit bases amongst any bank in the country, meaning that the potential for losses, if depositors couldn’t get their money out, would be substantial.

Along with other regional banks, they would offer higher than average rates on their banking deposits to help attract new capital.  In order to offer these higher rates, they had to increase the risk they took while investing these deposits, often investing deposits in longer-duration assets and  a mortgage-backed portfolio.  The problem with investing in these longer-duration assets is that as rates rose the portfolio lost money unless they could hold the positions to maturity.  As redemptions were called in, the bank was forced to sell some of these long-dated assets at a steep loss.  This raised concerns about the financial stability of the firm and when they attempted to raise capital through a stock sale, depositors panicked and started to withdraw assets at record rates.  The government had to step in and freeze redemptions to prevent a further run on the bank and within a few days the bank was no more.

From what we know so far this looks like a product of poor corporate management and not something that is systematically wrong with the banking sector. Thankfully for most depositors, the government was able to step in and insure all depositors, at no cost to taxpayers.  The good news is that this helped to prevent further contagion throughout the banking industry which would have been devastating for the industry moving forward. On the flip side, by the government stepping in they have removed a moral hazard from the banking sector.  If banks and depositors think that the government will just step in during a future crisis, then they are less likely to have proper risk controls in place to protect depositors.

There will be some other long-lasting impacts moving forward. As we saw during the days following the collapse, depositors flooded to the larger money center banks. This will lead to the big banks getting bigger and create a landscape where the smaller regional banks will struggle to attract new capital. Furthermore, the smaller regional banks could become more risk-averse in their investments and thus lose the benefit of offering depositors higher rates.  Profit at these smaller banks will take a hit and the large banks will reap the benefits.

Inflation and Rates

The big market-driving story over the past year has been elevated levels of inflation and the subsequent rise in rates to help combat this inflation.  The big question that investors have been asking is can the Fed thread the needle of taming inflation without causing a widespread recession?  It is a tough task because the impacts of rate increases tend to be lagging so we don’t fully know what impact these rate increases have had on the economy yet.  Pundits, large investors and economists have come out of the woodwork to state their case on what should be done and the dispersion of opinions has been all over the map. Some have said that markets will drop another 20% while others are calling for the start of a new bull market. This has made it very difficult to make investment decisions and even with the jump in some sectors since the start of the year, the markets are still fighting for directionality.

In times like this, when there is a lot of uncertainty, I like to simplify things, and understand what we do know and what we can control:

  • Inflation has been too high for a while but has been trending down over the past 6 months.
  • Prior to the pandemic, inflation was below long-term averages since the financial crisis so some of the jump in inflation could be some reversion to the mean.
  • Rates have been raised to levels we haven’t seen in over a decade, but the Fed has signaled that these rate increases will end soon.
  • The full impacts of elevated rates on inflation and the economy are still not known as there is a lag on this impact.
  • The yield curve is inverted offering investors a way to hide out in shorter-duration assets until the market shows some directionality.
  • The economy and employment market have shown signs of slowing but there are still just under 10 million job openings.
  • Earnings growth is expected to be right around flat if not a little negative but there are still some companies growing rapidly and little impacted by elevated rates.

 

So, what do we do with this information? I think it is important to first point out that I expect these uncertainties to persist for quite some time. There is too much dispersion of opinion within the investment community for real directionality to happen.  We will see continued volatility in both directions but large bounces in the markets will be sold and large drops will be bought creating a range-bound market, albeit with a relatively wide range.  This volatility will continue until we see some consistent data on the inflation and earnings front. I also expect this earnings season to help us understand who is winning in the current environment and in what sectors the signs of recession are starting to show themselves. Earnings guidance will be muted as is often the case during times of uncertainty, but a lot of this is already priced into many names.

For the long-term investor with few short-term capital needs, now is the time to make sure your allocation hasn’t shifted too far out of balance. There has been a dispersion between sectors, company size and style. This can lead to a portfolio being out of balance.

If you are investing in individual names, I would focus on those with consistent profitability and strong balance sheets.  Timing the market during these times of uncertainty can be difficult but adding to quality names when they are priced at a large discount to where they were a year ago can be a good way to add value to your portfolio.  However, I would recommend dollar-cost averaging into any new positions as I think this uncertainty will be around for quite some time, providing ongoing entry points.

I would also look to take advantage of the high rates on the short end of the yield curve.  The spread between the dividend yield on the S&P 500 and the 10-year treasury is larger than it has been in more than a decade, meaning the premium you are paying for dividend yield is not very attractive compared to bonds. Owning the treasuries or bonds directly is a much better option than owning a bond fund as this helps to eliminate price risk if you can hold the bonds to maturity, which is a lot easier with an inverted curve.

Strategy Commentary

I continue to maintain a neutral stance across portfolios.  I expect to see continued volatility for the rest of the year as the markets grapple with higher rates and the prospect of a recession.  Some of the economic slowdown is already priced into markets.  One of the driving factors for the rest of the year is going to be determining if anything more of the economic slowdown needs to be priced in. As discussed, I expect the market to be volatile within a wide range until we get some more certainty on how much the interest rate hikes will impact economic growth.  I am content maintaining a neutral stance until some of these questions get answered. I will look to add to some equity positions if we see a further pullback or we start to see signs that the recession fears are overblown.

Domestically, I am still advocating for a bar-belled approach with exposure to technology and communication services on one end and defensives on the other.  We saw technology pop in the first quarter and the defensives lag, but if we see the market turn more negative, the opposite will be true.  Within these sectors, especially on the technology side, I am still focusing on high-quality, profitable names rather than chasing the more volatile high beta names.  I do think stock picking will outperform for the rest of the year as some names are able to withstand the economic slowdown better than others. Finding these winners can help to drive outperformance in portfolios.

Internationally, the eurozone has performed well so far this year.  I have been neutral on the region so I definitely missed out on some of its outperformance.  I continue to maintain a neutral stance on most developed markets.  The threat of a spillover from the Ukraine conflict still adds additional tail risk to these markets and I am willing to sacrifice the potential outperformance to miss this risk.  The same can be said for emerging markets.  I have selectively added over the past year but these additions have been short-lived.  Uncertainties around China make it tough to invest with much conviction in the region.

On the fixed income side, I continue to reduce the duration of our positions and have been adding short-dated treasuries to most portfolios, especially in instances where we have excess cash. This is a great place to hide out until we have some more conviction in the equity markets. I have also been shifting some assets from bond ETFs to owning the actual securities. Owning the actual bonds or treasuries and holding to maturity eliminates some of the price risk and since we are buying mostly on the short end of the curve, we are not giving up too much liquidity.

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The Brave Report: Market Commentary for June 2021

Click here for .pdf version of this report: The Brave Report-June 2021

Time to take a breath…. After the torrid start to the year, we finally saw the markets stop a take a breath.  While the country continues to reopen and the prospects of a more “normal” summer seeming quite real it is now time to take an assessment of how much the recovery is priced in and what the next catalyst to push the market higher will be.  So far this year, the theme has been some weakness across the tech landscape, and the reopening trade taking center stage.  Many of these reopening trades have driven the Dow and the S&P to outperform but there are still several questions surrounding this trade.  How quickly will these companies return to pre-pandemic fundamental performance? And will any actually benefit in the long-term from the efficiencies gained during the year?  There is obviously some pent-up demand that should help benefit the travel and leisure sectors in the short term, but we will still have to wait and see if this type of demand has staying power.  For now, the markets are taking a moment to digest how far we have come and figure out if some of these names or sectors have moved past their fundamental expectations.

Market Overview

The major indices produced mixed results over the past month as the markets took a breather.  The Dow Industrials advanced just shy of 2% while the NASDAQ lost 1.5%.  The S&P 500 finished the month slightly positive.  After the start we have seen to the year I am not surprised to see a little consolidation and I wouldn’t be surprised if we saw some continued range-bound trading as we continue to see the economy open up.  These kind of consolidation periods are key for continued bull runs and can allow fundamentals to catch up with stock prices, especially in some of the reopening trades. As I mentioned last month, there are some areas where this consolidation has been going on since last summer so I would expect these names and sectors to be the ones that lead the way higher.

On the fixed-income side of things, we also saw some range-bound trading.  The 10-year treasury started and ended the month yielding right around 1.6%.  The theme here remains the same as we debate the potential of inflation and how soon the Fed needs to change its accommodative stance.  Economic data continues to be strong, but the Fed has yet to hint at any major policy shifts in the short term.  With the economy continuing to open up and increased government spending on the horizon there is a risk that the economy overheats a bit but I think we still have quite a ways to go before this becomes an issue.

Over the past few months, we have continued to see the recovery trade outperform while many of the stay-at-home trades, that did so well during the pandemic, have lagged. On the surface, this makes sense.  The stay-at-home names saw their revenues skyrocket last year while the more economically sensitive names lagged due to the uncertainty around the pandemic.  With the economy opening up around the country, this narrative has reversed, and capital has flowed back toward the economically sensitive names.

Moving forward, however, I would make the argument that it doesn’t have to be one or the other.  While the surge in revenue we saw for some companies last year is not sustainable, the pandemic has had some long-term impacts on consumer behavior and how the workplace operates. These changes accelerated the adoption of technology across a lot of parts of our lives and helped to create efficiencies that will have a meaningful impact on corporate results. As we have seen some of these stay-at-home names lag, I would look at this as an opportunity to identify those companies that have been able to transform their business due to the pandemic.  Not all companies that saw a surge in revenues last year will be able to use it to sustain long-term growth but there are a number of names that have and will be able to use these changes in behavior to springboard their companies further.

On the flip side, with money flowing into the recovery trade, I would be cautious to just start throwing money into some of these more economically sensitive names.  Yes, there is a major pent-up demand right now that will translate into increased spending across many industries but that doesn’t mean all of these names will prosper in the long run. There has been the tendency to just start putting money into travel and leisure names, but we must still be prudent in assessing which companies are able to translate this increased demand into long term-sustainable growth.  We must understand that some consumer behavior has changed forever.   The companies that have been able to adapt to this changing landscape will be the ones that will attract new capital past this quarter or next.

As we have seen this recent consolidation, I also think the markets are looking for their next big catalyst to initiate the next leg higher.  Much of this increased demand has already been priced into a lot of sectors and we are now in an environment where second a third-quarter results will need to justify these prices.  We saw a similar scenario play out last quarter as a lot of earnings results in big tech were sold because so much of their stellar results were already priced in.

With several spending bills on the table and uncertainty about inflation still lingering there are a number of things that could be the catalyst for the next move.  With underlying fundamentals being strong already I do not think this catalyst needs to be something groundbreaking but could just be these variables being in line with expectations and providing no surprises to the downside.  If we can get through some of these spending bills with inflation still in check, we could be entering a goldilocks scenario for the economy.  The markets just need to continue to take a breather while some of these variables shake themselves out

Strategy Commentary

Over the past month, my overall allocation has changed very little so this strategy commentary will be a bit boring this month.  We have seen some of the consolidation that I discussed last month but no substantial pullbacks.  With economic fundamentals continuing to be strong I will look to add to my equity allocation if we do see any weakness over the next month.  With the economy continuing to open up I think we could see a very strong 2nd quarter as some of the pent-up demand is released.

Domestically, I am still overweight technology and while it has lagged over the past few months, I don’t see any imminent changes.  I missed the boat on some of the reopening trades but at this point, I don’t think it is worth chasing as they have run pretty far already this year.  I will be watching the spending negotiations closely over the next few months, as the outcome could have a great impact on which sectors outperform in the 2nd half of the year.  I am still biased toward quality rather than the more speculative names.  I am comfortable missing out on some short-term runs in some profitless individual names.

Internationally, I am starting to look a little at Europe.  I haven’t added to any positions yet but I have had a reduced allocation to the region for a while now and will be watching closely to see if bringing this to a normal allocation level would be prudent.  I continue to like China in the emerging markets. I think that some other EM countries still have a long fight ahead of them with the pandemic so for now I am staying away.

On the fixed-income side, my positioning has not changed.  I am still holding extra cash as a proxy and until we get some directionality from rates, I am comfortable avoiding the potential risk of rising rates.

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The Brave Report: Market Commentary for May 2021

Click here for .pdf version of this report: The Brave Report-May 2021

The Great Reopening…  With vaccine numbers continuing to rise and states throughout the country continuing to loosen COVID restrictions we are starting to see some semblance of a return to normalcy.  Economic data and earnings results from the first quarter also reaffirm that the economy is roaring back.  This economic growth is expected to continue as the government attempts to roll out a series of large spending bills and the spring and summer weather helps to add fuel to the reopening of states.  While it would be expected that this should add to continued upward momentum in the stock market (which I’m not saying can’t happen), it is important to remember that the markets are a forward-looking mechanism.  With the returns we saw last year and have seen to start the year there is a fear that much of this economic growth is already priced into stocks.

I do expect to see continued upward pressure in the markets in the mid to long term but would not be surprised to see some period of consolidation or weakness as the economic data continues to catch up with market prices.  With the potential of increased government spending, the markets will also need to hash out the potential impacts of inflation as we work toward a full reopening.

Market Overview

I feel like a broken record in recent months, but all three major indices continued to move higher, all reaching new all-time highs in the last week.  The NASDAQ and the S&P both advance more than 5% and the DOW gained around 2.7%. This brings YTD gains for the S&P and the DOW above 10%. The NASDAQ has lagged slightly but is still up around 8% so far this year. This represents one of the better starts to a year we have ever seen but it also gives me some pause. I, like most everyone, like to see the market go up but at some point, I think taking a breather would be healthy if we are to see these gains continue without a major correction. I would prefer to see a period of consolidation rather than a big pop followed by a big drop. There are some areas of the market and some specific names where this consolidation has already happened, but it needs to be broader.

On the fixed-income side, we saw rates stabilize after rising rapidly to start the year.  After peaking out around a yield of 1.75% at the end of last month, the 10-year spent most of the month trading around 1.6%.  The rate complex will be very interesting to watch in the coming months as the markets play ping pong with inflation concerns.  The strength and speed of the economic recovery will also play a large role in where rates go next.  Currently, there is a large spread of predictions for rates with some analysts predicting a full retracement back below 1%, with others expecting 2+% rates over the summer. If economic data continues at this pace and some of the government’s spending comes to fruition, I think a rise in rates is inevitable, it’s just a matter of when.

We have been getting new 1st quarter economic data almost every day over the last couple of weeks and it continues to reaffirm that the economic recovery is in full swing. Covid cases are down, and it seems each day a new state loosens their restrictions, adding more momentum to the economic recovery on Main St.  On Wall St., earnings data, so far, has also been positive showing that companies have been able to capitalize on the reopening.

With that said, much of this economic recovery was expected and the primary reason that the markets have been performing so strongly so far this year.  This begs the question, have the markets moved too far too fast?  We have seen this play out a bit during earnings season.  A number of names have put through extraordinary numbers, well above even the most optimistic expectation, but have not seen the expected stock price performance following their announcements.  Historically, this “buy the rumor, sell the news” mentality is a sign that much of the good news is already priced into the markets and can sometimes be a signal of a short-term top. Last year we saw a dynamic where there was a great dispersion between Main St. and Wall St. performance where economic data was terrible, but the markets were on fire. We could be entering an opposite scenario where Main St. economic data is stellar, but Wall St. performance lags because all the good data is already priced in.

Now it is important to point out that I am not calling for a large-scale correction in the markets but more a scenario where the stock market takes a bit of a breather while we continue to get economic data that validates the market’s current levels.  I think this would be healthy for the markets as we want to avoid entering a period of euphoria that then results in a much larger selloff.  I think this would allow a lot of names to create a base of support before the next move higher.

Another major variable we have seen enter the conversation is the fear of increased inflation as the economy roars back.  The kind of economic growth we have seen has historically led to increased inflation. Outside of the economic growth, the government has also proposed some major spending bills.  These are on top of the huge stimulus bills that were passed because of the pandemic.  We are still a long way from getting either of these new bills passed and I doubt they are passed in their proposed form but it is a clear sign from the administration that they intend to be aggressive in their spending agenda. This type of spending would also put quite a bit of upward pressure on inflation.

They have also been a bit unclear as to how they plan to pay for these massive spending bills.  A few proposals have been put forward to increase taxes on the very wealthy and increase capital gains rates but these are expected to be met with quite a bit of resistance from the other side of the aisle and I doubt would come close to footing the bill.  While the spending bills would increase economic growth and continue to help fuel the economy, until we know how they are going to be paid for it is difficult to handicap the impact on the markets.  If capital gains rates are used as a lever this could have a large impact on the markets since so many investors are sitting on so many gains. Until we know more about the plan though, we are just wasting our breath speculating about it.

No matter how they pay for it, this type of spending will have an impact on inflation.  The Fed does not seem overly concerned about rising inflation and in all their recent decisions have continued to stress that inflation is well within their long-term targets.  I think we are still in a wait-and-see time in terms of inflation.  Right now, much of the positive economic data is catch up from last year and this will continue for some time.  Until we are further beyond the recovery and returned to “normal” economic times it is difficult to understand what long-term impact the recovery has had on inflation.  In the meantime, I expect to see some volatility around the inflation debate since it would have a large impact on rates.

Strategy Commentary

My overall equity allocation has been consistent over the past month.  The economy continues to gain steam but throughout it, I have been hesitant to add to my equity allocation as I think we could be entering a period of consolidation.  With that said, I am also not reducing any of my exposure.  While we may see some weakness in the short term, I am comfortable holding the course.

I continue to maintain my overweight to technology.  There has been a bit of a rotation away from tech in the last few months but recent earnings reports, especially from the large tech names, have reaffirmed their strength.  I also think we have already seen some consolidation in the sector so they should be the names to lead us higher once the whole market has a chance to take a breath.  This overweight has definitely led to some underperformance in recent months, but I am still comfortable with my positioning. Within tech I am much more biased toward the larger, profitable names, rather than the speculative profitless ones. Domestically, I did trim some of my small-cap growth exposure and rotated it into mid-cap value as some of these names could benefit more from the recovery.

Internationally, I trimmed some of my broad emerging markets exposure.  With COVID raging in a few of the developing nations, I think being much more selective in my exposure is warranted.  I am still optimistic on China. It has pulled back over the past few months and I think this provides some selective entry points.  I am not rushing out but if we start to see some upward momentum I will be quick to add since I think the valuation picture looks quite strong there.

On the fixed income side we are kind of in no man’s land.  I continue to hold extra cash as a proxy for some of my fixed income exposure and until we get some directionality on inflation and rates I will maintain this positioning.  There isn’t enough yield right now to justify the risk of rising rates.

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The Brave Report: Market Commentary for March 2021

Click here for .pdf version of this report: The Brave Report-March 2021

Sell the froth…. With major averages rallying to new highs during the month we started to see some of the very lofty valuations get called into question. Over the past few months, we have seen some amazing rallies in a number of names simply based on their story about the future.  These prospects for future growth vaulted some names to dot-com era valuations.  As interest rates rose throughout the month these valuations started to get called into question and we saw a rush to the door and a rotation away from some of these highflyers.  While much of this selling can be justified, we have seen this selling capitulate a bit and even the tech names with strong fundamentals and more reasonable valuations get caught up in the rotation to more economically sensitive sectors.  Is this rotation going to just be a short-term correction or will this rotation stick as we see the economy accelerate as it opens up?

Market Overview

After selling off to end the month of January, the major indices all rallied to new highs in the middle of the month of February.  From there, we saw a bit of bifurcation as a small rotation away from tech stocks and into the more economically sensitive reopening stocks occurred to close out the month.  When the dust settled, the DOW gained 3.17%. The S&P 500 moved higher by 2.61% and the NASDAQ settled slightly negative on the month.  Optimism of progress on the virus front and rising interest rates led to some selling across the tech space.  There was some profit-taking in the high-flying names and some continued consolidation in the larger tech space.

On the fixed-income side, rates jumped sharply, especially on the long end of the curve.  The 10-year treasury bounced from around 1% in late January to above 1.5% to close out the month.  This was one of the sharpest moves in rates we have seen since the pandemic began.  Fears about rising inflation and uncertainty about how the Fed will manage rates as the economy recovers caused a rush of selling throughout the month.  Even with this sharp jump in rates, it is important to point out that rates still remain historically low.  Prior to the pandemic the 10-year treasury has only yielded below 1.5% twice in history (2012 and 2016) and in both instances, it was for a very brief time.

This rapid rise in rates has brought bond prices close to an oversold territory and with it some downward pressure on some of the more interest-rate-sensitive areas of the markets.  Optimism about the economy bouncing back and a fear of inflation caused more selling in bonds than we have seen in a long time. However, it is important to point out that rates remain historically low.  We also have a long way to go before the economy returns to where it was before the pandemic.  The Fed has shown no signs of tightening or raising rates and while the recent pressure on rates has been to the upside, I think we could settle into another trading range while the next move is determined.

The reopening trade has also been driving the markets in recent weeks as optimism over case numbers and the vaccine rollout has led many states to loosen their restrictions around the virus. I do think this presents a great sense of optimism for the country and the economy, but I also think it is important to acknowledge that we are not just going to hop back into business as usual and the economy we return to, in the short run, could look a lot different than it was a year ago.  Many businesses have been shuttered and consumer behavior has changed.  There could also be a lasting reluctance for people to resume their previous activities as fear has been the default mindset for many.  Yes, I believe there is a pent-up demand across many populations in the country, but that demand will be slow to be satisfied in many areas. I continue to think the economy will make a strong recovery, but I would also stress patience as you look to use this as an investment theme.

One of the other big stories we saw to end the month was weakness across the large tech space and in some of the stay-at-home names.  This caused a swift sell-off in the NASDAQ and a rotation in the sectors that are leading the markets. While this may seem like a new variable in the market, this rotation, especially from big tech has been going on for a while.

Coming out of the pandemic lows back in March 2020 the large tech names were the ones that led the rally. Amazon and Apple were up around 100% from the March lows at one point. However, over the past 6 months, the story has changed.  The major indices have all continued to rally but we have seen a rotation out of these large tech names and into other areas of the market. Of the five largest companies in the US (Apple, Amazon, Microsoft, Alphabet and Facebook) only Microsoft and Alphabet have seen positive returns with only Alphabet outperforming the S&P 500 in the trailing 6 months (Amazon and Apple are actually down over 10%).  During this same timeframe, the S&P 500 is up over 10% and the small-cap Russell 2000 is up over 42%.

This sharp rotation can be attributed to several factors. First, and foremost, these larger tech names rallied so much coming out of last year’s March lows that they were due for a period of consolidation. With the pandemic in full swing last year there were a lot of uncertainties about if and when the economy would recover, so a lot of investors piled into these larger tech names as a safe haven. Now that we have some clarity that the economy is coming back that haven is no longer needed, and we can now better project out revenue and earnings for the economically sensitive sectors of the economy.

Second, rates have risen rapidly in the last month which puts downward pressure on higher growth stocks since the higher-yielding bonds become a more attractive alternative.  The higher yields can also increase borrowing costs for companies making it more expensive to raise capital. The increased rates also change the valuation equation. As the discount rate rises, future revenue and earnings become less valuable. At this point, I think this reaction is a bit overdone, as rates still remain extremely low. This is especially true for the larger tech companies who have proven current earnings and revenue and also have record levels of cash on hand.  The more speculative, narrative-driven, stocks with negative cash flows could be impacted more as rates rise. Their valuation is more based on expected future cash flows so are more sensitive to this change in the discount rate.

Lastly, as we saw aggressive buying into some of the high-flying, more speculative stocks, investors needed to raise capital somewhere.  The obvious choice was to pull cash from their highly liquid winners.

While this type of rotation is normal and natural it seems to go against recent fundamentals and earnings.  Many of the names, especially the big tech names, just put through some of their biggest quarters ever, with many even raising guidance, but have sold off since.  So with this recent rotation and the overall markets still very close to their all-time highs where can we look for the next opportunity for gains?

As a long-term investor, I am always looking for areas of the market where the stock prices have lagged fundamentals and potential growth prospects.  In this case, I think some of the rotation into the more economically sensitive areas of the market can be justified.  While some sectors, like energy, have rallied a bit too fast, there are still some opportunities in Industrials, Materials and Consumer Discretionary. If you are underweight any of these sectors, I think increasing exposure would be prudent.

Additionally, while I may have missed the boat a bit rotating out of some of the big tech names a few months ago they now present an opportunity. This opportunity is not exclusive to just big tech but as we look across the tech landscape, we can identify companies that performed well during the pandemic but also will perform well in a reopening economy due to innovation and shifts in consumer behavior. Now, this is not about advocating for any individual stock but there are several great long-term opportunities that are sitting at or near extremely attractive entry points from a valuation standpoint. I would be comfortable entering or adding to most of the large tech names at these prices. These are not short-term trades, but an opportunity to add quality to your portfolio at an attractive price. They may not be as exciting as speculating on Gamestop but the best time to buy them is when they are unloved and have pulled back or consolidated for a period of time.

Lastly, I would continue to stress caution in many of these high-flying “euphoria” names.  If you are a seasoned day trader, feel free to dip your toe in but there are a number of names across the market that have rallied too far too fast based on little change in underlying fundamentals. I am not just talking about the WallStreetBets names but there are a lot of speculative names that have run far past any expectation of earnings. While making a quick buck may seem tempting, unless you are a disciplined short-term trader, I would advise against getting involved.

Strategy Commentary

My overall equity exposure has increased slightly in the last month as I have started to buy some of the beat-up names and sectors over the last week or so. While we have seen some weakness in some areas of the market, specifically in technology, the prospect for economic growth coming out of the pandemic remains intact.  With the recent pullback, I will be looking to add to some equity positions as the opportunity presents. This may be in the form of increasing my overall equity exposure but for now, it has just been some internal rebalancing.

Domestically, I am still maintaining my overweight to technology. While this has been a painful place to be over the past few weeks, I think the selloff is a bit over down. Obviously, it would have been nice to properly time the rotation out of these names but the long-term story in this space is still intact.  I may even add to some names in the sector.  I am also still bullish on industrials, materials and consumer discretionary and will be looking to add to some names because they should benefit from the reopening economy.  The other shift I have made over the past two months is to decrease my large-cap exposure and increase my small-cap exposure, on both the growth and value side.

Internationally, I am maintaining my stance on Europe and although China has sold off quite a bit in the last few weeks, I will continue to add to my positions there.  They seem to be leading the world out of the pandemic on the economic front and the long-term upside can’t be ignored.

While I am not fully underweight fixed income, I continue to prefer a larger cash position to a full fixed income allocation. With rates rising over the last month, this strategy has paid off.  If we do see rates start to top out, I may look to increase some of this exposure.

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The Brave Report: Market Commentary for August 2020

Click here for.pdf version of this report: The Brave Report-August 2020

The recovery rally continues to plow forward with the S&P 500 breaking into positive territory for the year. While the S&P hasn’t regained its February highs yet, the NASDAQ has risen back to all-time highs and is now up around 20% year to date.  The debate continues to rage as to whether these valuations are justifiable. This discussion is more complicated than just a multiple of earnings discussion as there are many factors at play.  While there seems to be a disconnect between stock prices and the underlying economy, that does not necessarily mean that prices for some companies are not justified at these levels.  Yes, there are definitely some names and sectors that have no business being where they are, but I would argue that there are a lot of companies that still have room to run. Recent earnings announcements have only strengthened this argument. The key moving forward will be identifying these winners while also keeping a cautious eye on the entire market as we enter the fall and the potential for new COVID restrictions becomes a reality again.

Market Overview

Over the past month, all three major indices rallied higher.  As has been a consistent trend for a while now the NASDAQ was the big winner, gaining more than 8% in July.  The S&P 500 advanced by more than 5.5% and the DOW was the laggard but still gained around 3.3%.  Based on the driving components of each index, it is not surprising that the NASDAQ and the S&P 500 continue to outperform.  Their largest components are the big tech names which seem to have weathered the COVID storm better than everyone and are poised to actually benefit from the recent environment.  The price-weighted DOW is less tech-oriented and has thus lagged.  I do not see this trend changing any time soon but with the run tech has been on there may start to be some opportunities in other sectors just based on relative valuation.

On the fixed-income side, rates continue to creep lower as the expectation for a quick economic recovery becomes more muted.  While stocks have bounced back rapidly, the injections of liquidity and the expectation that rates will remain low for a while have continued to put downward pressure on rates across the yield curve.  The 10-year treasury ended the month trading in the low .50% range which, outside of the sharp drop we saw on March 9th, is lowest it has traded.  Outside of a huge turnaround in virus numbers or a major vaccine or treatment breakthrough I expect this downward pressure to remain.

As earnings and other economic data have rolled in over the past few weeks, we have started to get a better picture of the short-term economic damage caused by the coronavirus pandemic.  I stress short term because all of this data is backward looking, and we still have a lot of unknowns looking forward.  2nd quarter GDP dropped by the most in history but is this just a temporary setback for the economy or is some of this damage permanent? I think the answer to this question depends on what happens over the next six months. Will we need to lock down the country again? What will the government do to continue to stimulate the economy and prop up small businesses? Will we get a medical solution to the pandemic? The answers to these questions will define the long-term economic fallout.

Based on the stock market performance over the past few months it seems most investors are optimistic that the long-term impact will be muted, or the government will continue to do whatever is needed to prop things up. While we wait for things to play out, the Fed has injected an unprecedented amount of liquidity into the market and has signaled multiple times that they plan to continue this accommodative policy as long as is necessary.  The President and Congress are also working to pass a new stimulus package to continue to prop up small businesses and the unemployed.  While both of these steps are much needed and are helping to support the economy until we get back to some sort of normalcy in our society, they are still just putting band-aids on a bullet hole. Many more steps will need to be taken to make sure the ripple effects of these policies don’t drag on our economy into the future.

Even with all of this government intervention, there will still be a lot of losers coming out of this pandemic, especially on the small business side of things.  PPP loans can only do so much and we have seen and will continue to see the shuttering of thousands of businesses.  On the corporate side, there will be a transformation as to how business is done. This will force most companies to adapt to survive. I expect to see a lot of consolidation throughout the corporate world as companies will need to merge in order to survive in the “new” world.  This will be most apparent in the commercial real estate, retail and travel industries.  While these types of consolidations will be painful for many, it will allow new efficiencies to be realized and force companies to better allocate their capital which in the long-term would be beneficial for business.

With the pain we are seeing in some areas of the economy, earnings data has also shown that a number of companies have greatly benefited from this crisis.  I discussed a few months ago that some companies will benefit from the changes of behavior during the pandemic but then things will go back to normal. While other companies will benefit during the pandemic and also see long-term benefits coming out of this.  This sentiment has been very apparent during earnings calls and it is showing in their stock performance.  The large tech companies are the best examples of this, and we can see this illustrated in the unprecedented outperformance of the tech-heavy NASDAQ since the crisis started.

Outside of the pandemic, there are two other big overhangs in the market right now.  Tensions with China continue to flare up and the election is looming only a few months from now.  As Trump has seen poll numbers drop he will need to do something to rally his base and create the perception of some wins going into November.  His stance on China has been one of his most popular and I expect to see continued saber rattling on this front.  We have seen the downward pressure these types of tensions can put on the markets so I will be cautiously watching any developments in this area.

Additionally, if a Biden victory becomes the de facto stance, it will be important to see who he aligns himself with over the next few months.  His big donors expect him to remain moderate, especially in financial matters but if we see the more progressive members of his party start to play a bigger role then the markets would start to look at his presidency much more cautiously.  On top of the presidential election, it will also be important to keep an eye on how the senate is trending.  With democrats already controlling the house, I expect a Biden win, coupled with the Democrats gaining control of the senate being viewed negatively by the markets.  This creates a scenario where some of the more progressive, anti-business policies have a much greater chance of becoming a reality.

Strategy Commentary

From an allocation standpoint, I made very few changes over the past month. I have rejected the urge to chase as equities have rallied and I think a period of consolidation after earnings would be very beneficial to the long-term health of the markets.  There are a lot of names that do deserve the bounce back we have seen but I remain cautious as there are still a lot of uncertainties heading into the fall.  The potential for another lockdown and uncertainties around the election put us in a position where I would rather wait before adding on the recent strength.

While I may sound like a broken record, I am still maintaining my overweight to technology. Consumer discretionary has outperformed over the past few months but I have resisted the urge to add to this position as another lockdown could add pressure to the sector.  Communication services have also outperformed but again I am maintaining my equal weight there until we get some more certainty in the economy.

I have been slowly adding back to my European exposure that I went underweight a few months ago.  I am not back to a normal weighting yet but as they seemingly have done a better job controlling the virus there could be some attractive opportunities.  This could all change if the virus spikes again but it is something I am watching closely. I have been looking to add back to some Asian, particularly Chinese, exposure but it seems that every time I do, another tension, whether domestic or with the US, creates a new level of uncertainty.  The long-term story in China is still intact and as long as you can withstand the short-term fluctuations it is a place where I want to increase exposure over time.

I did not expect rates to drop to the levels we are currently seeing, and I have continued to be neutral on fixed income.  I still have more cash than normal as a replacement for fixed income but in the current environment, having some extra cash on the sidelines seems appropriate.

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The Brave Report: Market Commentary for June 2020

Click here for .pdf version of this report: The Brave Report-June 2020

In these reports, my job is to take all that is going on in the world and discuss how I think those variables are going to impact the financial markets and the economy. With almost every issue, there is a financial impact.  There are winners, losers or opportunities and it is my job to identify them.  However, there are some issues or events that are more important than just economics.  So even though my job is the financial perspective I would be remiss if I didn’t mention anything about what is currently going on in this country before jumping into my normal report.

This country has a deep wound that has been festering for years.  For some in this country, this wound of racial injustice is ever-present.  It impacts all aspects of their life, debilitating opportunity and forcing them to live in a constant state of pain or oppression. However, far too many in this country find it easier or more convenient to ignore this wound or simply try to put a band-aid on it and continue to move on with our lives.  Worse than this, there is a large percentage of the country that has convinced themselves that this wound doesn’t even exist or is not their problem to worry about. But whether you feel this pain yourself or are privileged enough to avoid it, it impacts us all on a societal level. It is not a red or a blue issue, a right or a left issue. It is an all of us together issue. Unless we as a country take proper steps to really treat this wound then it will continue to fester and kill our society from the inside.

I don’t know what the right way to treat this wound is, but it is very apparent that what we have done so far is not working.  So now, more than ever, we need to come together as a country to develop a solution. This solution can’t just mute the pain or cover it up but needs to actually treat the root cause. No matter how we are feeling, triaging or understanding this wound on an individual level, it is times like these that we must all listen to those who feel the pain of this wound most acutely in order to understand and treat it.  We must all understand that this pain is there and that it can’t be ignored anymore. This wound is not just a scratch that will heal quickly but a wound that will take years and repeated treatments to heal. The process will not be easy and many in this country will have to acknowledge uncomfortable truths about ourselves and our society.  However, if the proper steps are taken it is not just those that feel the pain that will be the beneficiaries, we, as a country, will come out as the winners.

Market Overview

The recovery rally continued in May as we saw the Nasdaq surge another 7.5% to reach back toward the all-time highs seen in February. The S&P 500 and Dow Industrials also surged, both gaining around 4.5%. While the Nasdaq again led the gains, near the end of the month we started to see a rotation from the “stay at home” stocks into recovery stocks. This created a sharp rise in some of the more beat up sectors as traders showed optimism about a swift economic recovery.  We also saw some chasing throughout the month as investors that had missed the initial bounce off of the March lows and had bet on a retest of those lows raced to not miss out on the entire recovery. This has put equities in an interesting position as a lot of the buying was indiscriminate. The economic data and fundamentals now need to play a bit of catch up.

Things remained pretty calm on the fixed income side throughout the month with rates remaining relatively range-bound. The 10-year bounced between a yield of 0.6% and 0.75% throughout the month. As we start to get some more economic data about the recovery in the next few weeks I expect the pressure to be to the upside for rates.  The expectation is for the virus to weaken throughout the summer and this should mean full steam ahead for reopening economy.  However, the real long-term test will be how things progress into the fall.  If progress toward a treatment or vaccine continues on a rapid pace than this recovery could be for real. This would lead to an increase in rates. But, if we see any setbacks and a resurgence of the virus in the fall then I expect us to return to this range we have been in for the last few months.

Tailwinds: One of the key characteristics of the market over the last month has been a rotation back into cyclical stocks.  Many of these stocks were the big losers on the way down as the outlook for the economy looked dire.  Even in the first phase of the bounce off the lows many of these stocks remained depressed as investors chased the defensive and stay at home names. Now, a number of tailwinds have emerged, and a lot of cash is pouring off the sidelines and looking for a place to go.

  • The Fed and Stimulus: The major tailwind in the market has been the massive fiscal and monetary policies implemented over the past few months.  The Fed basically came out and injected enough liquidity into the markets to backstop almost every asset. While I still expect a number of bankruptcies to occur coming out of this (especially on the small business side of things) the Fed has told most businesses that they are there as a lender of last resort.  By removing these downside tail risks, companies don’t have to just spend this time trying to stay afloat but are able to get back to business as usual.  On the stimulus side, we have seen trillions of dollars plugged back into the economy to help support those that are out of work and allow small business to weather the storm.
  • Virus progress: We have also seen rapid progress on the health side of things. The possibility of a vaccine being available by year-end is becoming more of a reality and we have seen infection numbers and mortality drop rapidly over the last month.  Much of this can be attributed to weather and the precautionary steps we are all taking as individuals but with many states reopening over the past month, there has been a fear that we would see a rapid increase in infections.  This hasn’t materialized as much as feared.  I know we are far from out of the woods on this front and things could change rapidly, especially with so many people gathering together for protests, but this summer reprieve from the virus that some health experts predicted is playing out.  One of the key variables that we will all have to monitor is if we see a resurgence in the fall as the weather cools.  On top of this, it will be important to monitor how states and individuals react to any hotspots or virus outbreaks as many may be a little more reluctant to lock down a second time.
  • Chasing: The last major tailwind we are seeing in the markets is what I call the FOMO (Fear Of Missing Out) trade.  During the initial selloff and subsequent bounce, we saw a lot of “smart money” and retail investors alike raising cash and waiting for another market pullback or retest of the lows before putting that money to work.  That pullback never occurred so all of these investors that still have cash on the sidelines are now rushing back into the markets to try not to miss the entire recovery.  Rather than put this money into the high-quality names that have already bounced all the way back (for fundamental reasons I should point out) and are sitting at all-time highs these investors are pouring money into the really beat up cyclical names in hopes that they can make up ground with the names that are still well off their highs.  This kind of chasing has been driving the markets over the past few weeks.  You can easily see it happen as various names bounce 10-20% overnight or during one trading day.  This buying is not just because these investors like these companies and think they will perform well coming out of this but there is a rush to not be the last one in the door

As we look at these three tailwinds, the first two have legs and should be the factors that help to lead us out of this crisis.  The last one, however, gives me pause and could be dangerous for some investors.  Just as panic selling on the way down should be avoided, panic buying on the way up can be equally as risky. Yes, I agree that many of these names were very undervalued from a long-term fundamental standpoint but many of these beat-up names were down for good reasons. They should be down because even if we eradicate this virus in short order, the virus will have lasting impacts on human behavior and some companies will see a negative impact on their fundamentals because of this.

Now, if you are a trader and are getting in and out of some of these names for a quick profit, be my guest.  But for the disciplined long-term investor, I would stress caution during a time like this.  At some point, the fundamentals have to catch up with the stock price. This is true to the upside and the downside.  If you truly like some of the names that have been bought heavily over the last few weeks, I would advise you to not just run out and try to chase them.  Identify them and find a price point where you would like to buy them.  If this initial pop fades than you are there ready to buy. If not, you have that capital ready for another opportunity.  This extra capital could also come in handy if we see any virus resurgence in the fall or the economic recovery not happen as rapidly as is currently being priced in.

Strategy Commentary

I continued to maintain my equity exposure over the past month. While the market continued to surge, I am still a bit cautious of going all-in on equities.  When the buying becomes indiscriminate it means that many names are getting bought for no reason other than they were well off their highs.  This doesn’t factor in that many of the names may deserve to be way off their highs.  When cash is flowing into names at such a rapid pace and we see these huge daily gains it is a sign that fundamentals are not being considered at all.  We are just seeing the FOMO trade as investors race to get back in.  At these times, I tend to remain cautious and only look to add on any weakness to those names and sectors I like for the long term, not just the flavor of the week.

Domestically, I continued to maintain my overweight to Technology. This served me well for most of the month. It can be tempting to rotate into some beat up sectors like financials or the travel sector as money flows that way but I still think there are too many long term uncertainties in these areas to make full portfolio shifts.  I would rather miss out on some short-term upside then chase these sectors and risk them pulling back again should lockdowns need to be reinstituted.

I shifted to underweight Europe a few months ago on an expectation that the US would better weather the economic storm and have a greater ability to stimulate the economy.  This showed to be the case, but we are now entering a phase where Europe and Asia are opening quickly and may start playing some catch up to the US.  I have not added back to these positions yet but could be looking to rebalance back into some of these areas as they continue to show strength.  I will also be looked at select emerging markets.  With cases surging in South America I will probably stay away from that region but will continue to try to identify opportunities in Asia.

While I did miss out on the drop in rates to start the year, we are now in a position where the pressure is to the upside on rates.  For that reason, I will continue to maintain my neutral to underweight allocation to fixed income.  If we see any negative news on the health side of things, I will be quick to add back to these positions.

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The Brave Report: Market Commentary for May 2020

Click here for .pdf version of this report: The Brave Report-May 2020

The stock market is not the economy….at least not always. The country is shut down. Businesses are closed and unemployment claims are reaching levels never seen in history. Yet the stock market just completed its best month in more than 30 years and one of its best months in history.  On the surface, these two vastly different pictures do not seem to make much sense. While we have seen some states start to open up a little, we are still a long way from normal. Until we have a viable treatment or a vaccine, the fear surrounding this pandemic will be woven into all facets of our lives for many months or even years to come. Yet, we have seen one of the fastest stock market recoveries in history. All the major indices are still down substantially since this crisis hit but we are well of the lows we saw in March.  So, the questions remain; How can the economy look so bad and the stock market be performing so well? And is this bounce back in the market justified?

Market Overview

The markets bounced back sharply during the month of April. Following one of the worst months in history in March, all major indices saw one of their best months in history in April.  The Nasdaq outperformed, jumping close to 15% during the month bringing its year to date performance close to flat for the year.  The S&P 500 and Dow Industrials jumped 12.7% and 9.7% respectively but both remain down more than 10% for the year.  The tech-heavy Nasdaq was propped up by its largest names who have held up better during this recent market turmoil. Its 4 largest components are all positive on the year with Amazon up more than 30% and Microsoft up more than 10% (as of the end of April). This outperformance of a few large names, which are the largest contributors to index performance, has helped to mask the real carnage that is going on in most of the market.

On the fixed-income side, we finally saw some stability in rates.  After record-setting volatility in March, we saw rates settle into a relative trading zone for most of the month.  During the last two weeks of April, we saw the 10-year treasury trade in just a 10-basis point range, finally settling around .60% to close the month. For reference, the 10-year traded in a 90-basis point range during the month of March.  With the Fed maintaining overnight rates at 0%, I do not expect too much movement in the short run.  I do not see them moving to negative rates and without a major positive shock to the fundamentals of the economy I see no reason that rates will increase any time soon either.

Throughout this crisis, I have received a lot of questions from clients, prospects and friends.  Recently these questions have all echoed the same sentiment. How can the markets be bouncing back so much when the economy looks so bad?  I agree that there is a disconnect between what we are currently seeing in the markets and what we are seeing in the economy, but I would also argue that we are not too far off from a fair valuation. The trip we took to get here is the irrational part of the equation and not the actual market level we are currently sitting at.

The important thing to remember about the stock market is that stock prices are not a representation of company performance yesterday or even today. Stock prices are a representation of future cash flows of a company. Those cash flows go well out into the future so there will often be a disconnect between market performance and current economic performance.  Therefore, expectations of future economic performance hold much more weight than what we are seeing today.  A recent example of this can be seen just back in February when the crisis hit.  The economic data was still coming in strong. Unemployment was still low and GDP growth was actually revised up. However, the market dropped sharply based on the expectation that the pandemic would have a huge negative impact on the economy, which it has. In February, the same argument could have been made that the market was not trading in line with economic performance, just in the other direction than we are seeing today.

Now, as we are in the peak of economic negativity the market is rebounding based on the expectation of improved economic performance.  We are seeing progress on the health side as the curve is flattening in some areas and some treatments are showing efficacy. Some states have chosen to start opening up their economies and we have seen the government throw unprecedented amounts of money at the problem.  With all these things considered, the expectation is that the economy will start to improve. Thus, investors have started buying stocks again, driving prices higher, even in the face of dire economic news. This is not irrational as many have questioned but rather in line with the fundamentals of stock pricing.

The other variable at play here is the emotional side of investing. In times of panic and euphoria, we often see outsized moves up and down.  In this case, when the pandemic hit, we saw panic selling drive prices far below where they should have gone.  As the news changed and the outlook became more positive, not only did we have to factor in the good news, but we had to make up for the overshoot to the downside first. This caused the recovery to look that much more impressive. Now that we have seen the overshoot to the downside and the rapid recovery back up I think the markets are now in a situation of figuring out where fair value really is.  In the absence of any other positive or negative shocks to the system, I think a period of consolidation would be beneficial to the markets.  We can remove the emotion from the markets and start investing based on fundamentals again. This will give markets the chance to really parse out the actual economic impact of the pandemic.

If we forget about the path we took to get here and just look at where we are as a point in time than it is much easier to make a rational assessment of where we are and if we are over or undervalued.  Last year the S&P 500 had total earnings of around $140. Analysts are currently projecting that earnings will drop by 17.8% this year. If that projection holds true, then earnings will be right back where they were in January 2018 ($115). Interestingly, at current levels, the S&P 500 is trading at the same market level that it was in…January 2018. However, the difference is that there is an expectation that earnings rebound back to where they were this past year within a few quarters, especially if you factor in the unprecedented fiscal and monetary policy that the government has implemented. If this is the case, then the argument can be made that the market is actually undervalued as compared to January 2018 since those expected future cash flows will be higher than they were in January 2018. Now, whether the markets were fairly valued in January 2018 is a discussion for a different day, but it helps to put into perspective the current valuations of the markets and whether we have bounced back too quickly

What to do now? It’s now time to move past the initial drop and pop of the crisis and determine how to best be positioned moving forward. A lot of the initial emotional reactions are behind us and we can now more clearly define the winners and losers of this pandemic.  More than ever, we will be in an environment where the proper sector or company allocation will have a drastic impact on investment success. While identifying who the winners and losers will be, I like to break the market down into four types of companies/sectors as an initial screen for deciding where to invest.

  1. Double Losers: The first are those companies and sectors that are being hurt by the immediate impact of the economic shutdown and will also see long-term or lingering negative impacts on their business models moving forward.  These companies are being hurt drastically now and it will be years till they recover to post-crisis levels if they do at all. The most obvious examples in this group are those companies in the travel sector and brick and mortar retail.  Not only is their revenue almost zero during the pandemic but long-term habits will be forever changed coming out of the crisis. It will take a while before leisure travel returns as individuals remain cautious about flying. Additionally, the lessons in business efficiency that will be learned from people being forced to work from home will have permanent impacts on business travel, which is the driving force of profitability for the airline and hotel industries. Over time there will be no other choice but consolidation within these sectors with only a handful of winners eventually emerging.
  2. Short-term Losers:  Second, there will be those companies and businesses that take an immediate hit from their businesses being closed but then return to business as usual once the economy is finally opened back up.  There will be short term pain but in the long run, these businesses will be fine.  There will be some consolidation as some overleveraged companies cannot survive the short-term downturn in business but for the most part the pain will be short-lived.
  3. Short term Winners: These are the companies that see a spike in business activity due to the Pandemic but then their business returns to normal.  There is nothing wrong with these companies and they may see a short-term bounce in their stock prices as investors emotionally pile in, but I would be careful with these companies.  Their long-term prospects will not have changed and like what has been discussed before, stock price is based on future earnings and not just what they can make over 1 or 2 quarters. Some of these companies will be able to leverage their short-term success enough that they become part of the final group but for the most part their long-term business models will not have changed.
  4. Double Winners: The final group is the companies you want to focus on as you look to invest during and coming out of the pandemic.  These are the companies that are seeing a surge in business due to the pandemic and will also see a long-term change in their businesses in the post Covid world.  They will also hold up the best if the pandemic lingers or we see a 2nd wave of infections.  Some of the large tech and cloud companies would fall into this category along with companies like Amazon and other large online retailers.  For cloud companies, we have seen a surge in usage as people have been forced to work from home and a huge amount of data has been migrated to the cloud.  This surge will not be short-lived though as the efficiencies of a mobile workforce will be realized and companies of all sizes needing to be cloud-based will become the norm and not the exception. The same can be said of online retail as forced adoption during the crisis will lead to the long-term conversion of those that were tentative to shop online before.

It is important to point out that this is just an initial screening or grouping. There will be winners and losers in each of these groups and companies within each of them that are worth investing in or avoiding. This also does not factor in company strengths or weaknesses coming into the crisis such as balance sheet strength, leadership characteristics or past performance. I could write an entire report that breaks down who I think will be the real winners and losers coming out of this but that is a much longer discussion. The easiest thing to do is to ask yourself two questions:  Does this company/sector benefit from the current economic environment?  Will their long-term business model or growth rate benefit positively in a post Coronavirus world?  If you can answer yes to both questions, then you can start creating your list of companies or sectors to add to.

Strategy Commentary

As we discussed during the market drop, it can be dangerous to make many widespread allocation changes during times of such high volatility.  The same can be said when the market bounces back so fast. My overall equity exposure remained neutral over the past month.  I did slightly adjust the allocation, but the overall equity exposure has been consistent. Volatility has come down a bit over the past few weeks and as we see continued consolidation, we will reassess what damage has been done to long term allocation targets.

Domestically, I trimmed some exposure to utilities, bringing the overall exposure closer to neutral.  Utilities can act as a defensive play during risk-off environments.  As we make our way out of the crisis, I expect money to shifted away from this sector.  I did add to some selective positions as I have identified some perceived winners moving forward.  Most of these additions were in what I have been calling the modern defensive stocks.  These include many of the large, stable, tech stocks that have strong balance sheets. Their size gives them the ability to increase market share during times of turmoil.  These names performed the best during the initial market drop and I expect the same as we emerge from the crisis or see any continued weakness.

I continue to maintain my underweight to Europe for the same reasons I mentioned last month.  So far, this thesis has been playing out as expected.  Over the last month, Europe only gained 3.3%, far underperforming domestic equities.  Year to date Europe also trails, losing 22% as compared to down 10% for the S&P 500. There will be a point where valuations become too attractive to ignore in select European companies, but I think we are still a few months away from that. I am still watching select emerging markets but am mostly focused on Asia as I think we will see continued weakness in South America as the weather changes and we see a potential surge of cases in the southern hemisphere.

On the fixed-income side, I see rates staying low for the foreseeable future, but I think the risk is to the upside for rates.  There is not much more room for rates to drop and if the economy can bounce back, we will see rates rise.  I am maintaining current exposure for now.

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The Brave Report: Market Commentary for February 2020

Click here for .pdf version of this report: The Brave Report-Feb 2020

Watch out for the unexpected… With the markets seemingly set to continue their upward momentum from last year, the brakes were put on pretty fast. Going into the year we thought we had a good idea of what the uncertain variables were that would drive the markets.  This allowed us to take the necessary steps to prepare for them or take advantage of them. But, as is often the case in investing, the true unexpected trumps all and can cause sharp moves in the market.

This was the case this month as the Coronovirus outbreak in China put a quick damper on the early year party. Fears of a pandemic and a dent in global growth quickly sent the markets tumbling.  While they have stabilized since the initial pullback, a lot of questions remain.  At first glance, the overall economic impact seems to be muted but the speed at which the virus is contained and treated will be the real determining factor as to its lasting economic impact.

Market Overview

After continuing last year’s upward trend to start the month we saw some selling to close out the month due to fears over the Coronavirus.  The NASDAQ still eked out a slight gain of less than 1% while the S&P 500 and Dow Industrials both lost less than 1%.  This marked the first down month for these indices since August and only the third down month since the start of 2019. With earnings season starting off on a mostly positive note I don’t expect this downtrend to continue. If we can get some clarity around the Coronavirus and its economic impacts than I think the markets can continue higher.

On the fixed-income side, we saw a massive drop in rates as investors rushed to safety later in the month.  After reaching a high yield of 1.9% early in the month the rate on the 10-year treasury plummeted down to a low of 1.51% to end the month. This still keeps the yield above the 3-year low yield that we saw in early September.  The move lower seems very reactionary to the Coronavirus outbreak and is not surprising considering that we were sitting at all-time highs in the equity markets.  Investors used the events in China to take some profits and quickly move to safety.  If the virus gets contained without too much damage, I think rates will probably bounce back quickly.

Coming into the year I discussed several variables that could drive the markets over the course of the year.  Most of these I would put in the category of “known unknowns.” By this I mean we know the uncertainty is there, but we don’t know how it is going to impact the markets.  We know the election will impact the markets, but we don’t know how it will yet.  We know there will be continued trade negotiations with China, but we don’t know how these will play out.  These types of uncertainties can be planned for, handicapped, hedged against or taken advantage of.

On the other side of the equation, and often more impactful in the short term are just the “unknowns.”  We sometimes call these black swan events.  These are uncertainties that surprise us so are much more difficult to plan for.  They also tend to send more drastic short-term shocks (both positive and negative) to the markets as emotional, reactive decision making dominates. The recent outbreak of the Coronavirus would fall into this category.

Coronavirus: With the markets starting the month by continuing to march higher the fear of a pandemic quickly put the brakes on things. Obviously, the human impact of this virus is much more important than the financial side but my job here is to discuss the economic and investment impact so I am not trying to be insensitive to the health toll this is or could have.

Let’s first put this outbreak into perspective. At the time of writing this, there had been 20,000-30,000 confirmed cases and around 500 deaths. It is important to handicap all of this by saying these are the numbers that China is reporting, and their accuracy should be called into question.   Each year in the United States the Flu infects between 15 and 20 million people and kills around 10,000.  The US population is 23% the size of the Chinese population. I  understand that we are still in the early stages of understanding and curing/preventing this new virus strain but at this point it has had a very minimal impact when compared to other similar diseases. I don’t pretend to be an expert in anything medical or health-related, but until this outbreak spreads or its mortality rate increases it seems it will have a very negligible impact on world health.

With that said, even if this virus’s health impact remains small on a global scale that does not mean it won’t have an economic impact on certain regions or sectors. China has taken steps to limit travel, lockdown certain provinces and forced people to remain at home. This will have a short-term impact on their growth this quarter and probably throughout the year. In terms of the global economic impact, slower growth in China will drag on global growth this quarter.  We could also see some sector impact here in the United States. Luxury goods and travel will take a hit as Chinese consumers stay home, and travel is limited to and within the region.  Other companies with large revenue exposure to China could also be impacted.

If the virus can be contained in short order the damage should be limited to just a handful of sectors. However, if this drags on for a few more months and factories remain closed longer than expected than we could see a larger global impact as the global supply chain gets disrupted.  Most companies can handle a short-term disruption but if companies are forced to source elsewhere or cut domestic production because they aren’t receiving supplies from China than we could see some greater downward pressure on domestic growth or an increase in prices. So far, few companies have factored in material changes to their earnings guidance due to the outbreak. It will be important to continue to monitor earnings calls to better understand the expected impact.

So how should you react from an investment standpoint? As with other black swan events, the whole market tends to sell off dramatically regardless of the actual economic impact to specific companies. This can create some great buying opportunities once the dust settles.  It is a great time to identify sectors or individual companies with little or no exposure to China or the Chinese supply chain. This should be relatively easy as it will be a similar list to the sectors we identified during trade negotiations over the past two years.  I am not saying you should rush out and start buying hand over fist, but as we get some clarity on the containment and treatment of the virus these will be the first companies and sectors to bounce back, especially with many of them announcing earnings over the past week or two.

Strategy Commentary

I continue to maintain the same overall exposure to equity.  Even with fears that the Coronavirus could slow global growth, especially in Asia, I think any damage will be short-lived. I also think the spillover to the US will be minimal. With earnings continuing to be strong I think the pullback near the end of the month was a great long-term buying opportunity.  I already had a slightly overweight equity exposure so I did not have any free cash to add to my positions, but had I still been underweight equity I would have added.

Domestically, I continue to maintain my overweight to Technology.  While the sector continues to outperform, earnings continue to prove that there is more room to the upside.  I am still overweight financials based on some good earnings results but with rates dropping sharply last month this could put some pressure on some of their lending operations.  I have trimmed my industrials exposure and added a little to utilities.  Utilities have been an outperformer for the past year, and I think they continue to represent a good hedge if Coronavirus impact increases or we see and other shocks to the system.

I have adjusted my international outlook, especially in Asia, due to the Coronavirus.  While I think the economic damage will be very short-lived. The increased risk doesn’t justify the potential return.  We may look back and see this recent pullback as a great buying opportunity in Asian stocks, but I think there are less risky places to put that money to work.  With that said, I reduced my exposure to Japan.  In the long run, I still am bullish on China but will wait till we see some progress on the virus before adding back to any positions.

I have not adjusted my fixed income allocation but with the drop we have seen in yields over the past month we could be close to a reversal.  The Fed continues to be predictable and without any other black swan shocks, I think rates will probably stabilize back to the range they were in over the past 4 months.

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The Brave Report: Market Commentary for September 2019

Click here for .pdf version of this report: The Brave Report-September 2019

Why so nervous?  While the markets edged higher over the past month, we are starting to see a case of the jitters as investors have become more reactive to even the smallest news stories.  Part of this can be attributed to the lack of corporate data coming out over the last month but this type of nervousness is often a sign that investors are searching for the next short-term directional move in the markets.  Market bulls are searching for reasons to keep buying but when the catalysts start to dry up we can see outsized moves to the downside on any negative news as bulls run to the sidelines. With the absence of any constructive financial news, this should cause an uptick in volatility and may lead to a short-term pullback.  With that said, if we get any positive catalysts, I expect to see the buyers rush back in, especially with earnings season on the horizon and trade talks about to resume with China. Traders don’t want to be on the wrong side if trade war progress is made and earnings surprise to the upside. On the other side, investors don’t want to be the last one out the door either.  This kind of polarized environment can make it very difficult for the average investor and increases the need for investors to be patient and think longer term.

Market Overview

The major indices all edged higher during the month of September but finished a few percentage points off the mid-month highs.  The S&P 500 was up 1.7 while the Dow Industrials rose 2.4%.  The NASDAQ was the laggard, eking out a gain of around 0.4%. The markets rallied to start the month, making back most of the losses from August but ran out of steam as the S&P failed to push above the July all-time highs.  This now puts the markets in a bit of no man’s land, searching for some directionality.  However, the next month will provide us with a plethora of market-moving information.  Trade negotiations, earnings data and a Fed meeting should help to paint a picture of where the economy is going for the rest of the year.  As I mentioned, I expect volatility to pick up as this information is digested and traders decide if global growth fears are overdone.

On the fixed-income side, volatility seems to now be the norm.  Rates rose rapidly for the first half of the month, with the yield on the 10-year jumping from a low of 1.43% to above 1.9% in a week and a half.  This upward pressure subsided as the month progressed and rates settled back into the 1.60s.  Similar to the equity side of things we are seeing rapid swings on any news as investors rush in and out of safety and try to predict where the Fed is going next.  Rates globally still remain near all-time lows with a number of developed countries still maintaining negative rates.  While the US rates are not quite that low, they still sit near historic lows. With trade war uncertainty still hanging over the business world I expect these sudden rushes to safety to continue until we get some resolution.

Impeachment Inquiry: Over the past year or so I have discussed how uncertainty has been the driving force behind markets and has been the key for short-term directionality.  This has primarily centered around the trade war and Fed policy. We have seen moves in both directions as the outlook for both of these uncertainties becomes more and less clear.

We now have an additional uncertainty to add to the list as calls for impeachment have ramped up over the past month.  In question is a phone call from President Trump to the president of Ukraine.  It is not my job to debate the validity or justification of the impeachment inquiry but to try to understand how it impacts my clients and their investments.  With the absence of a smoking gun, we can expect the cloud of impeachment to become a distraction as the process plays out and is dragged through an election year. The impacts will be far-reaching as it becomes a new variable in the trade war and any other policy progress.  Will this embolden the President to get a trade deal done to help distract from the negative press brought on by impeachment or will this weaken our negotiating stance as China becomes more comfortable waiting for a new administration to negotiate with on a long-term trade deal? I do not think a full impeachment will become a reality unless some major new facts are revealed but that will not stop the democrats from turning this into a political circus.  This will push a number of other policy initiatives like infrastructure reform to the back burner and could essentially bring Washington to more of a standstill than it is already in.

Trade War:  Negotiations are set to resume as a high-ranking Chinese delegation is set to come to Washington in the next week. It will be interesting to see how this round of negotiations plays out.  There are several different variables at play heading into these negotiations and many of them are at odds. The President is in desperate need of a win going into the election cycle and a positive trade agreement would fit the bill.  While I have expected a trade deal to materialize at some point between now and the election, I now think there is a much greater chance of a piecemeal agreement rather than a full, comprehensive deal at this point.

While the President desperately wants to be able to tout a major presidency defining win, reaching a trade deal now is at odds with his other desire for the Fed to cut rates.  The Fed has cut rates, in part, because of the prospect of slowing global growth.  The driving force behind this slowdown is the trade war with China.  If a comprehensive trade agreement is reached it would reset the global economic outlook and reduce the need to cut rates.

Layer on top of this the Chinese stance.  The absence of an upcoming election gives them a much longer-term focus and allows them to be much more patient.  If they feel the impeachment inquiry is going to go anywhere or Trump’s prospects of reelection are dropping, they are much more likely to delay any deal.  They know Trump has tied his presidency to stock market performance and as the election draws closer is much more likely to blink at the negotiating table.  They also would probably be more comfortable negotiating with the next administration if Trump loses (depending on who it is). This all lowers their incentive to get something done and creates a situation where they are much more likely to agree to a watered-down agreement now while they wait to see what happens on the US political front.

From an investment standpoint, all of these “what ifs” make it very difficult to operate in the short-term.  The market is moving rapidly on any news and any news that is coming out seems to not be very material.  For the long-term investor, it is important to not let emotion drive any short term investment decisions.  We will see volatility but when actual material events occur those that have been patient should be rewarded.  As I have mentioned on a few previous occasions, if we see any sharp market-wide pullbacks it creates a great opportunity to buy high-quality names on sale, especially those with little exposure to trade with China.  I think this dynamic will exist throughout the next year or until we get some substantial clarity around trade.

Strategy Commentary

I continue to maintain the same equity allocation as a month ago.  Nothing material has changed so I am still holding my equity allocation at slightly below normal.  So much of the global growth fear is tied to uncertainty around the trade war. Until we start to get some information out of the upcoming trade talks, I do not expect to make any substantive changes.  While my expectations from the meetings are muted, we should get an idea if any progress or deterioration is happening and this should help to inform any upcoming allocation changes.

Domestically I am still maintaining an overweight to Technology and Consumer Discretionary.  These sectors have been quite volatile and seem to react considerably to any trade news. I continue to regret not adding to my Utilities position earlier this year as this sector has been the biggest outperformer.  I did not expect the trade talks to be so drawn out and expected the rush to more defensive sectors to be short-lived.  As uncertainty over trade has continued for more than a year, more investors have been rotating out of the growth sectors and into more defensive areas.  This rotation will reverse if any progress is made on the trade war but this, again, is the big “what if.”

I am still staying away from most international markets.  The valuations in both Europe and Asia are looking more attractive but growth prospects and political uncertainty in the EU makes it difficult to increase exposure there.  If we continue to see a rotation into value, I may start to look more at some of the higher dividend, value plays in Europe. We have seen some of the big banks become more constructive on the region over the past month, but I am in no rush to get in. Additionally, if there is progress on the trade front with China, I will be quick to start increasing my exposure there, especially to higher-quality names that have been kept down by trade uncertainty.

With the uptick in volatility in rates, I am starting to look at some opportunities in the space.  I expect the Fed to cut rates again in one of their next two meetings. However, if the trade war sees any progress during the upcoming talks, the rush to safety will probably slow and this would put some upward pressure on domestic rates. For now, I am maintaining my neutral stance on fixed income.

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The Brave Report: Market Commentary for July 2019

Click here for pdf version of this report: The Brave Report-July 2019

Note: This report was written over the weekend and prior to the selloff to start this week, which obviously changed some things.

Did we all forget about the trade war?  It seems that most investors forgot that we are still trying to work out a trade deal with China (along with several other countries).  No matter what the earnings look like and how strong other fundamental may be, when put in the spotlight, the uncertainty around the trade war trumps all else and tends to send investors reeling. It seems that any rhetoric or threat about trade makes investors and traders sell first and ask questions later.  The computers and algo-trading systems exacerbate the issue sending stocks plummeting. We saw this in the 4th quarter last year and again in May. I am not saying some selling isn’t warranted but we continue to see outsized moves whenever any negative news comes out about the trade war.  The selling isn’t selective and even companies with no direct impact from trade with China are caught up in the carnage.  This creates frustration for many investors but also tends to create some great opportunities.  By identifying those companies that are unfairly brought down we have been able to find some great long-term buying opportunities. When the dust finally settles the prudent investor should have a list of quality stocks or sectors that they can buy at a discount.

Market Overview

The markets edged higher during the month of July with the Dow Jones Industrials gaining around 1% and the S&P 500 and Nasdaq gaining 1.3% and 2.1% respectively.  This left the indices all hovering close to all-time highs and drove volatility back down again.  This isn’t surprising as volumes tend to shrink during the summer months.  This, however, can be a double-edged sword.  While tepid interest in the markets during the summer months can lull some investors to sleep and make for comfortable vacations, any shocks to the system can have an exaggerated impact since liquidity is lower when volumes are down.  This can sometimes be worrisome entering August as it tends to be one of the worst months of the year for market returns.  Most traders and investors have already seen great gains for the year so it wouldn’t be surprising if any negative news pushes people to take profit and move to the sidelines for the rest of the summer.

On the fixed-income side, rates were stable for the month. The 10-year treasury hovered in the low 2 percent range for most of the month even with an anticipated rate cut later in the month.  This shows me that the most recent rate cut was almost entirely priced in and although some were expecting a larger cut, the lack of movement in either direction confirmed that the cut we got was expected.

Throughout the course of the year, we have had three big uncertainties that the market has been dealing with; the trade war with China, Fed policy and the worry of an earnings slow down.  Even with these headwinds, the market has had one of its best starts to the year in history.  The question remains, where would we be if we get resolution on any or all of these issues? It seems when uncertainty around one of these issues is resolved another one rears its ugly head.  This month was no different.

Trade War: It has seemed for most of the summer that the trade war was taking a back seat to the Fed and earnings season.  This all changed on August 1st when Trump again ratcheted up his rhetoric, tweeting out the threat to add additional tariffs to Chinee goods on September 1st. This broke what had been a cease-fire agreed upon in June at the G-20 meetings. The market reacted accordingly, selling off rapidly.  I expect China to retaliate in some fashion but at this point, there aren’t many more US goods that they can put tariffs on. Whatever form the retaliation takes I expect some market panic to ensue but how long it lasts will be the real question.  It is a sticky time for the Chinese president as Chinese leadership is in the middle of some major political discourse and that could have an impact on what they can do and how much they are willing to compromise. In the same vein, Trump has tied much of his success to stock market performance and a tanking market is not what he is looking for as the election cycle heats up.

The actual financial impact of these new proposed tariffs is minimal, representing around one tenth of a percent of GDP but this last tranche of tariffs will hit retail and the consumer more than previous rounds of tariffs. It has now brought up questions about what the President’s end game is.  So far, the US has taken the brunt of the financial impact of the tariffs. Since first increasing tariffs on China the government has collected around $20 billion in tariffs but have subsidized our own farmers more than $28 billion to account for losses due to tariffs imposed by China.  This doesn’t even factor in the other negative impacts of a trade war, most notably the erosion of business confidence.

We are now at the point where I don’t know if the President has a basic understanding of economics. This is a very scary statement as we have seen a simple tweet can drive markets in either direction. It is difficult to play the scenario forward and see a way that the US comes out as a real winner in this trade war or if it does, what will be the cost to do so. So far, the tariffs have basically been a tax on the American people as the costs just get passed along to the US consumer.  If you factor in the erosion in business confidence and the headwinds this fight has put on the markets the calculus just doesn’t add up for either side.

Earnings:  So far, earnings season has surprised to the upside.  Going into the quarter many expected earnings growth to turn negative after more than two years of double-digit growth as last year’s tax cut stimulus rolls off. However, with around 75% of companies having reported it looks like we could still see low single-digit earnings growth for the quarter. While this is a far cry from the earnings growth we have seen over the last few years it is far better than expected. The shadow of the trade war continues to weigh on quarterly results, especially for companies with Chinese exposure but even with that overhang companies continue to perform well. The domestic consumer remains strong and that seems to be helping to mute the impact of a slowing global economy.

Rate Cut: As was almost universally expected, the Fed cut rates for the first time in over a decade. While some were looking for a 50-basis point cut, the 25-basis point cut was in line with most expectations. The surprise, and for some disappointment, was that Powell’s comments didn’t indicate that this was the start of a series of cuts.  He continued to reiterate that future decisions would be data-dependent, but many were looking for more of an indication of future cuts.  There is still an expectation that there will be another 25-basis point cut sometime in the next six months but beyond that, there is a lot of uncertainty.  Inflation seems to be in check and employment data continues to be in line with the Fed’s mandate. Powell did note the potential for a slowdown in global growth, but this has yet to spill over to the domestic economy.

Strategy Commentary

I have maintained my equity exposure at slightly below normal since cutting some positions in May.  Trade war risks still persist and until we see some real progress on that front there will be an overhang over the markets. The markets have continued to march higher over the last two months, but I am comfortable missing out on some upside until we see some real progress with China. Most expected a trade agreement to be reached by now, but it is still casting a shadow over everything. Until this uncertainty is removed in a constructive way, I am comfortable being slightly below my normal equity allocation.

Domestically, I have maintained my overweight to technology and consumer discretionary.  I did trim some technology back in May but only slightly.  I have also shifted some of my equity exposure to larger-cap companies as the uncertainties in the market make smaller cap stocks riskier. If trade tensions again intensify, I will look to trim more technology exposure.  On the flip side if any serious progress is made with China I will quickly add back to some positions as I think this could be the catalyst for the next leg up in the markets.  However, as I have mentioned in the past the longer this trade war persists the more difficult it will be to undo the damage the year and half of trade uncertainty have caused.

On the international side, I have trimmed most of my international exposure to neutral or underweight. Continued trade uncertainty has muted any potential gains in Asian emerging market although I will look back to the area if trade tensions ease at all.  I am still underweight Europe as I see too many headwinds to expect any substantial growth in the near term.

With rates continuing to drift lower I am maintaining my neutral position in fixed income.  Trade uncertainty has caused a slight rush to safety. This combined with the expectation of a few rate cuts should keep yields suppressed. The big question will be how low yields can go especially considering the rate environment we are seeing around the globe.