Investment Insights Podcast: A quick review of July markets

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Leigh LowmanInvestment Manager

On this week’s podcast (recorded August 11, 2017), Leigh provides a quick review of July markets.

 

Quick hits:

  • After a strong first half to the year, positive economic growth continued into July.
  • Second quarter earnings came in strong with both revenue and earnings surprises accelerating from already strong levels.
  • the Senate’s failure to pass a healthcare bill cast a shadow on the “Trump trade”, bringing forth concerns on whether meaningful tax and regulatory reform can be accomplished.
  • Overall economic data leans positive and we expect markets will continue to trend upward over the near term.

For Leigh’s full insights, click here to listen to the audio recording.

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The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

 

August 2017 market and economic outlook

Lowman_150x150pxLeigh LowmanInvestment Manager

After a strong first half to the year, positive economic growth continued into July.  Risk assets were up across the board and volatility was notably muted. Second quarter earnings came in strong with both revenue and earnings surprises accelerating from already strong levels, helped by a weaker US dollar and depressed oil prices. On the political front, the Senate’s failure to pass a healthcare bill cast a shadow on the “Trump trade”, bringing forth concerns on whether meaningful tax and regulatory reform can be accomplished. However, this failure may serve as a catalyst for other pro-growth initiatives, such as tax reform, to be pushed through in the near future.  Overall economic data leans positive and we expect markets will continue to trend upward over the near term.

The S&P 500 was up 2.1% in July and reached a record high mid-month, stemming from many large corporations reporting stronger than expected second quarter earnings. All sectors posted positive returns with the largest outperformers being telecom (+6.4%) and technology (+4.3%). Large cap stocks outperformed mid cap and small cap stocks and lead year to date.  Growth outperformed value and leads by a large margin year to date.

market outlook

Developed international equities outperformed domestic equities, returning 2.9% for the month.  Improving fundamentals and increased investor sentiment in both the Eurozone and Japan helped spur continued positive economic growth.  Both regions remain heavily reliant on central bank stimulus programs and speculation has begun on whether the European Central Bank or Bank of Japan will begin easing in the near future. Emerging markets rallied, gaining 6.0% for July, with all BRIC countries posting positive returns.  Brazil was up over 11%, stemming from initial failed corruption allegations of the country’s president, Michel Temer.

Likewise India and China posted strong returns, fueled by strong economic growth and evidence of reform.

Fixed income markets were quiet during the month.  The July Fed meeting was relatively uneventful with an expected announcement of no changes to interest rates. The Bloomberg Barclays US Aggregate Index returned 0.4% with all fixed income sectors posting positive returns. The 10 Year Treasury yield ended at 2.3%, relatively unchanged from the beginning of the month.  High yield spreads contracted an additional 12 basis points. Municipals were up 0.8%, outperforming taxable counterparts.

We remain positive on risk assets over the intermediate-term, although we acknowledge we are in the later innings of the bull market and the second half of the business cycle. While this cycle has been longer in duration compared to history, the recovery we have experienced has been muted. While our macro outlook is biased in favor of the positives and recession is not our base case, especially considering the potential of reflationary policies from the new administration, the risks must not be ignored.

We find a number of factors supportive of the economy and markets over the near term.

Reflationary fiscal policies: Despite a rocky start, we still expect fiscal policy expansion out of the Trump Administration, potentially including some combination of tax cuts, repatriation of foreign sourced profits, increased infrastructure and defense spending, and a more benign regulatory environment.

Global growth improving: U.S. economic growth remains moderate and there is evidence growth outside of the U.S., in both developed and emerging markets, is improving. Earnings growth has improved across markets as well.

Business confidence has increased: Measures like CEO Confidence and NFIB Small Business Optimism have improved since the election. This typically leads to additional project spending and hiring, which should boost growth.

However, risks facing the economy and markets remain, including:

Administration unknowns: While the upcoming administration’s policies are still being viewed favorably by investors, uncertainties remain. The market may be too optimistic that all of the pro-growth policies anticipated will come to fruition. The Administration has quickly shifted from healthcare to tax reform legislation. We are unsure how Trump’s trade policies will develop, and there is the possibility for geopolitical missteps.

Risk of policy mistake: While global growth has improved, it is important that central banks do not move to tighten too early. The Federal Reserve has begun to normalize monetary policy, but has room to be patient given muted levels of inflation. The tone of the ECB has begun to shift slightly more hawkish.

The technical backdrop of the market is favorable, credit conditions are supportive, and we have seen acceleration in economic growth. So far Trump’s policies are being seen as pro-growth, and investor confidence is elevated. The onset of new policies under the Trump administration and actions of central banks may lead to higher volatility, but our view on risk assets remains positive over the intermediate term. Higher volatility can lead to attractive pockets of opportunity we can take advantage of as active managers.

Brinker Capital Market Barometer

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Source: Brinker Capital. Views expressed are for informational purposes only. Holdings subject to change. Not all asset classes referenced in this material may be represented in your portfolio. Indices are unmanaged and an investor cannot invest directly in an index. All investments involve risk including loss of principal. Fixed income investments are subject to interest rate and credit risk. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes, and different methods of accounting and financial reporting. S&P 500: An index consisting of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large-cap universe. Companies included in the Index are selected by the S&P Index Committee, a team of analysts and economists at Standard & Poor’s. Bloomberg Barclays U.S. Aggregate: A market capitalization-weighted index, maintained by Bloomberg Barclays, and is often used to represent investment grade bonds being traded in United States. Brinker Capital Inc. and Santander Investment Services are independent entities and neither is the agent of the other.

 

Diversification: The power of winning by not losing

Crosby_2015Dr. Daniel Crosby, Executive Director, The Center for Outcomes & Founder, Nocturne Capital 

The image is indelibly etched in the mind of baseball fans everywhere. In 1988, an injury-hobbled Kirk Gibson, sick with a stomach virus to boot, limp-running around second base and pumping his fist. Without a doubt, Gibby’s homerun is one of the most memorable in baseball history, setting up the Dodgers for an improbable Game One “W” and eventual World Series win. But in remembering the heroics of the moment, we tend to forget all that came before.

The score at the time of Gibson’s unexpected plate appearance was 4 to 3 in favor of the Oakland Athletics, whose mulleted (and we now know, steroid-fueled) superstar Jose Canseco had hit a grand slam in the first inning. Canseco had an outstanding year in 1988, hitting .307 with 42 homeruns, 124 RBIs and, eye-popping by today’s standards, 40 stolen bases. Loading the bases in front of Canseco was massively risky as was throwing him the hanging slider that he eventually parked over the center field fence. But riskier still was sending Gibson to bat sick with the flu and hobbled by injuries sustained in the NLCS. That we don’t perceive it as risky is an example of what psychologists call “counterfactual thinking.” It turned out in the Dodgers favor, so Tommy Lasorda is viewed as a strategic genius. But had it not, and simple statistics tell us that getting a hit is never in even the best hitter’s favor, Lasorda would have been a goat.

Just as we laud improbable and memorable athletic achievements without adequately accounting for risk and counterfactuals, we do likewise with large and singular financial events. Paulson’s shorting of subprime mortgage products. Soros shorting $10 billion in currency. These events are so large, so memorable and worked out so favorably that we ascribe to them a level of prescience that may not actually correspond with the expected level of risk-adjusted return. A friend of mine once joked that, “every man thinks he is ten sit-ups away from being Brad Pitt.” Having observed significant overconfidence among both professionals and novice traders alike, I might similarly assert that “every stock market enthusiast thinks that (s)he is one trade away from being George Soros.” The good fun we can have talking about, “The Greatest Trade of All Time” notwithstanding, most real wealth is accumulated by not losing rather than winning in spectacular fashion.

Diversification.Power of Winning by not Losing

The danger in taking excessively risky bets with the hope of a spectacular win is best illustrated by what is formally known as variance drain. Variance drain is the difference between mean return and compound return over a period of time due to the variability of periodic returns. The greater the variability from peak to trough, the more the expected returns will deviate negatively. Confused?

Say you invest $100,000 each in two products that both average ten percent returns per year, one with great volatility and the other with managed volatility. The managed volatility money rises 10% for each of two years, yielding a final result of $121,000. The more volatile investment returns -20% in year one and a whopping 40% in year two, also resulting in a similar 10% average yearly gain. The good news is that you can brag to your golf buddies about having achieved a 40% return – you are the Kirk Gibson of the market! The bad news, however, is that your investment will sit at a mere $112,000, fully $9,000 less than your investment in the less volatile investment since your gains compounded off lower lows.

A second, behavioral implication of volatile holdings is that the ride is harder to bear for loss-averse investors (hint: that means you and everyone you know). As volatility increases, so too does the chance of a paper loss which is likely to decrease holding periods and increase trading behavior, both of which are correlated with decreased returns. Baseball fans know the frustration of watching their favorite player “swing for the fences”, trying to end the game with a single stroke of the bat, when a single would do. Warren Buffett’s first rule of investing is to never lose money. His second rule? Never forget the first rule. The Oracle of Omaha understands both the financial and behavioral ruin that come from taking oversized risk, and more importantly, the power of winning by not losing.

The Center for Outcomes, powered by Brinker Capital, has prepared a system to help advisors employ the value of behavioral alpha across all aspects of their work – from business development to client service and retention. To learn more about The Center for Outcomes and Brinker Capital, call us at 800-333-4573.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a Registered Investment Advisor.

 

Investment Insights Podcast: The complacency of markets so far in 2017

Jeff Raupp, CFARaupp_Podcast_GraphicDirector of Investments

On this week’s podcast (recorded August 7, 2017), Jeff discusses how in an upward trending market like this, investors often start overestimating their risk appetite.

Quick hits:

  • This past Friday marked the 34th record high for the Dow Jones Industrial Average in 2017.
  • The largest market drawdown that we’ve experienced in 2017 is just 3%.
  • The key to long term investing is choosing a good long-term strategy that you can stay with through up and down markets.

For Jeff’s full insights, click here to listen to the audio recording.

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The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

Investment Insights Podcast: Emerging Markets – Going beyond the headlines

Holland_Podcast_150x126Tim Holland, CFA, Senior Vice President, Global Investment Strategist

On this week’s podcast (recorded July 28, 2017), Tim takes a closer look at Emerging Markets and why we own them.

Quick hits:

  • After under-performing U.S. and developed international equities for several years, Emerging Market equities are outdistancing both asset classes since the beginning of 2016.
  • The four largest emerging markets on an adjusted GDP basis are Brazil, Russia, India and China, often referred to as the “BRIC Countries.
  • While there are many positives to investing in emerging markets, there are also meaningful risks including political instability, infrastructure problems and currency volatility.
  • Considering the cyclical and secular tailwinds, we are overweight emerging market equities and remain constructive on the asset class.

For Tim’s full insights, click here to listen to the audio recording.

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The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor. 

Foreign securities are more volatile, harder to price and less liquid than U.S. securities; and are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.

Investment Insights Podcast: Changing dynamics of the active and passive debate

Chris HartHart_Podcast_338x284Senior Vice President

On this week’s podcast (recorded July 21, 2017), Chris provides some of the more interesting data points and perspectives that help shed light on this potentially changing dynamic.

 

Quick hits:

  • Just as stocks, styles, strategies, sectors, and industries go in and out of favor, so too should performance of active and passive strategies.
  • Passive investing might be peaking and future market conditions suggest a more favorable environment for active management going forward.
  • The incredible growth in the number of ETFs has created a strong headwind for active managers.
  • Correlations between stocks have been stubbornly high while the percentage of active managers outperforming has been below 50% since 2010.
  • The potential for inflation makes it increasingly difficult for markets to rely on the generosity of central banks and continued efficacy of monetary policy.  .
  • At Brinker we believe that both active and passive strategies play an important role in portfolio construction and asset allocation.

For the rest of Chris’s insight, click here to listen to the audio recording.

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The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

Communication, trust & stewardship: the key elements of a successful wealth transfer

Coyne_Headshot-150x150John Coyne, Vice Chairman

Ask any advisor who has been at it for a while, most clients come to them having spent more time planning vacations than planning for retirement. Similarly, parents spend their working lives preparing money for the family, but don’t prepare the family for the money.

Research supports both sentiments. Forty-five percent of parents remain close-lipped on the topic of wealth, while only 4 percent of those surveyed indicated they hold regular family meetings where money is the main topic.

Whether talked about or unspoken, the next generation stands to inherit a good deal of wealth. Industry experts estimate between $30 to $41 trillion will transfer from the Baby Boom generation to Generation X and Millennials over the next 30 years. Another reality is that in the majority of instances, seven out of ten, the second generation loses the wealth it inherits. In 90 percent of families studied, the money disappears by the third generation.

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Research cited in a 2014 Forbes article set out to better understand the shirtsleeves to shirtsleeves paradigm. It found that communication and trust played a far more influential role in predicting the success of the intergenerational transfer of wealth than planning or investments. Six out of ten of those who lost their family fortune blamed their condition on a lack of communication and trust in the family. Nearly a quarter of the respondents indicated their heirs were not prepared financially to inherit the wealth. Interestingly, only 3 percent attributed the losses to poor planning and investments.

The more the next generation knows of your hopes and dreams for the assets you’ve accumulated and plan to leave behind, the better positioned they will be to conduct themselves as financial stewards. Heirs inherit assets. Financial stewards assume the responsibility of caring for the wealth to benefit the family.

Below are five ways to encourage financial stewardship among heirs:

  1. Introduce the concept of family wealth planning. Begin to explain how family values contributed to the creation of the wealth, and how financial resources helped past generations achieve individual and family goals. Emphasize the notion that in order for wealth to serve multiple generations, family members must talk openly, trust each other and act as financial stewards.
  2. Create a family mission statement. Like a corporate mission, a family mission defines the full scope of the family’s wealth, its values and why money is important.
  3. Expand decision-making powers. The education-by-inclusion approach has proven quite successful in preparing the next generation for the assets it will one day inherit. Instead of you and/or your spouse making all of the financial decisions, you could gradually involve the next generation. Philanthropy and family vacation planning are the most common places to expand the decision-making dynamic in the family. To start, you provide parameters, set a budget, and establish your voting authority, but later take a step back and let your heirs develop a plan.
  4. Conduct regular meetings. Make legacy discussions part of your family’s calendared events so you have a forum for an open dialogue about your family’s values and vision for the future. Many families plan these discussions around events intended to create a shared experience, make memories and have fun. The activity doesn’t matter. Rather, building trust, cultivating harmonious relationships, having candid discussions and creating a healthy decision-making environment matter.
  5. Introduce your advisory team. Include your financial advisor in family meetings so children and grandchildren know where to turn when the time comes. A financial advisor can help set achievable investment goals and maintain reasonable performance expectations. When an advisor monitors, tracks and communicates progress toward goals, family members can more easily refrain from acting on short-term market conditions.

For 30 years, Brinker Capital has served financial advisors and their clients by providing the highest quality investment manager due diligence, asset allocation, portfolio construction and client communication services. Brinker Capital Wealth Advisory works with business owners, individual investors and institutions with assets of at least $2 million. To learn more about the services available through Brinker Capital Wealth Advisor, click here.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a Registered Investment Advisor.

 

Investment Insights Podcast: When it comes to crude oil, why lower for longer is a good thing

Holland_Podcast_150x126Tim Holland, CFA, Senior Vice President, Global Investment Strategist

On this week’s podcast (recorded July 12, 2017), Tim addresses crude oil, what’s been weighing on the commodity as of late, and whether we should view that weakness as a net positive or negative for the U.S. economy.

Quick hits:

  • Any, and all, discussion of crude oil must begin with fracking. Fracking has enabled energy companies to tap long known, but historically inaccessible deposits of oil and gas across the United States
  • The impact on U.S. production of oil and gas – and on global energy markets – has been revolutionary.
  • U.S. crude oil production should hit 10 million barrels a day in 2018
  • If Texas were an oil producing nation it would rank among the top 10 producers in the world

For Tim’s full insights, click here to listen to the audio recording.

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The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

Investment Insights Podcast: A quick review of June markets

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Leigh LowmanInvestment Manager

On this week’s podcast (recorded July 7, 2017), Leigh provides a quick review of June markets.

 

Quick hits:

  • Synchronized global expansion was evident during the second quarter with markets across the globe experiencing positive economic growth.
  • Overall economic data leans positive.
  • We expect markets will continue to trend upward for the remainder of year.
  • The onset of new policies under the Trump administration and actions of central banks may lead to higher volatility, but our view on risk assets remains positive over the intermediate term.

For Leigh’s full insights, click here to listen to the audio recording.

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The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

 

Investment Insights Podcast: Should investors fear the FANG stocks?

Holland_Podcast_150x126Tim Holland, CFA, Senior Vice President, Global Investment Strategist

On this week’s podcast (recorded June 30, 2017), Tim addresses the phenomena that is the FANG stocks.

 

Quick hits:

  • The FANG stocks have outdistanced the index in 2017; however, on an equal weighted basis, the S&P 500 is up approximately 7.4%, near what the cap weighted index has returned and a sign that market gains have been broad based
  • While the FANG phenomena may make for good TV content and market chatter, we don’t think it represents a risk to the recent rally
  • So, should investors fear the FANG stocks? At Brinker Capital, we believe the answer is no.

For Tim’s full insights, click here to listen to the audio recording.

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This is not a recommendation for Facebook, Amazon, Apple, Netflix and Google. These securities are shown for illustrative purposes only.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.