MRM Commentary

Commentary

Monthly Investment Commentary

NOVEMBER 2018

Tech Stocks Saw a Volatile October

    Technology stocks just capped off their worst month since the depths of the recession a decade ago.

    The Nasdaq plunged 9.2 percent in October, its steepest monthly drop since a 10.8 percent decline in November 2008. At that time the financial markets were in crisis and the tech-heavy Nasdaq was at the tail end of a six-month slump, during which the index lost more than 40 percent of its value.

    The tech sector certainly wasn't alone in October. Eight of the 10 subgroups of the S&P 500 fell, led by energy and consumer discretionary stocks, which dropped more than the tech group. The broader S&P 500 declined 6.9 percent, and the Dow Jones Industrial Average slid 5.1 percent.



    MRM NET COMPOSITE PORTFOLIO RESULTS (As of 10/31/2018)
    MRM Group claims compliance with the Global Investment Performance Standards (GIPS®).
    Please contact MRM Group to obtain a Compliant Presentation and/or MRM's list of Composite descriptions.

    MRM Portfolio

    Equity Performance
    Equity Performance

    October equity market weakness is not a reflection of current earnings, in our view. Please see the divergence between the blue and green lines in the chart above. Rather, we attribute it to the uncertainty surrounding the sustainability of strong earnings in 2019 and beyond amid rising concern about trade conflicts and their impact on global supply chains. The pace of earnings growth so far has slightly moderated relative to the second quarter as expected, but it’s still on track to be very strong year over year.

    What’s Ahead for Earnings
    October’s sell-off appears to be a risk-off event, with bond yields falling and defensive stocks outperforming. Our analysis shows a fade in overall market risk positioning not explained by current earnings; even the stocks of many companies beating analysts’ expectations sold off.

    Market participants look to be increasingly sensitive to the tone of corporate management teams’ forward guidance during earnings calls. A number of companies have talked about the impact on global supply chains of a deteriorating U.S. trade relationship with China. Increased tariffs could prompt some companies to shift supply chains out of China.
    Moving Forward

    It’s fair to expect a slower pace of earnings and sales growth in 2019, in our view. This partly reflects a higher year-on-year hurdle after the big boost to corporate earnings from U.S. tax cuts. We also see a moderate slowdown as consistent with our view that the global economy is transitioning to the later stages of the economic cycle. Yet the range of potential outcomes for corporate earnings looks to be widening, just as uncertainty around the growth outlook has risen. The outlook for corporate margins could turn south if trade conflicts escalate in 2019 and pricing pressures build further, potentially hitting earnings, and the equities prices.

    MRM'S VIEW

    Our best case is that solid global growth will support corporate earnings, but the risks to this view have increased as geopolitical tensions and less-stimulative fiscal and monetary policies amplify economic uncertainty. Against this backdrop, we have boosted our portfolio resilience via exposures to quality companies, particularly those with strong balance sheets and solid earnings prospects. Sectors like defensive, health care sectors in particular.

    Source: Blackrock

    MRM model holdings as of September 30, 2018

    Allocations

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    MRM Group, Inc. ("MRM") is an SEC registered investment advisor and an independent management firm that is not affiliated with any parent organization. Using quantitative selection methods, each MRM strategy searches within a well-defined universe of securities, using consistent investment criteria to identify attractive investments and create diversified portfolios. MRM seeks to provide long-term capital growth by generating above-market returns, protecting principal and managing volatility.

    Allocations

    The portfolios do NOT use inverse or leveraged ETFs. Universe vehicles may change, from time to time, when approved by the principal of MRM Group at its sole discretion.

    BENCHMARK NOTES

    The S&P 500 Index with dividends is an unmanaged composite of 500 large-capitalization companies whose data is obtained from the Standard & Poor's website. S&P 500 is a registered trademark of McGraw-Hill, Inc. The MSCI EAFE Gross Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada, with data from the MSCI website using price with reinvestment of dividends. The performance of blended benchmarks is shown for comparison because MRM uses securities which track indices related to these products. An investment cannot be made directly into an index.

    DISCLOSURES

    MRM Group claims compliance with the Global Investment Performance Standards (GIPS®). MRM has been independently verified for the periods January 1, 2008 through present. The verification report is available upon request. Verification assesses whether (1) MRM has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) MRM's policies and procedures are designed to calculate the present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation.

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