A battle of wits with the market

Williams 150 X 150Dan Williams, CFA, CFP, Investment Analyst

One of the greatest temptations of investing is trying to increase investment performance by continuously buying stocks right before they go up and selling stocks right before they go down. As a theoretical matter “timing the market” seems simple as in retrospect the overreactions or ignorance of the markets are clear. Yet, in practice, the task is regarded mostly as a fool’s errand as the timing always seems to be off.

The extremes of market movements relative to economic reality is not a new observation. In his 1949 book, “The Intelligent Investor,” Benjamin Graham asked readers to imagine themselves as a partner in a business with a fellow named “Mr. Market.” On a daily basis, Graham’s Mr. Market becomes wildly optimistic or pessimistic about the business’ value, therefore, is always trying to sell out or buy you out. Graham notes that an investor finds himself in that very position when he owns a listed common stock. The problem is that we are not separate from Mr. Market. Rather, we all contribute a little of ourselves to create this Mr. Market and what he feels, we collectively feel. When he is panicking and wants to sell, so do we. When he is euphoric about market prospects and wants to buy, so do we.

Additionally, Mr. Market is smart most of the time as he knows just about everything we collectively know, and given available information is approximately right about most stocks most the time. This is the oversimplified basis for the Efficient Market Hypothesis (EMH) that states that the market incorporates all relevant information efficiently and accurately into market prices. So what is to be done?

Timing the market

 
As always, I find a movie to reference. This time I am drawn to a scene in “The Princess Bride” where our protagonist, Westley, sits down to play a game of wits with the mastermind bandit, Vizzini. In the scene, two glass of wine are poured, Westley poisons one glass of wine, but mixes up which is which and places both glasses on a table. Vizzini then gets to pick which glass to drink from and Westley is compelled to drink the other. Vizzini, after thinking and overthinking all of the factors to consider and even switching the placement of the glasses on the table while Westley is distracted, takes a drink from one of the glasses and drops dead. We then find that Westley had actually poisoned both glasses and had previously made himself immune to the poison used. Therefore, the whole game of wits was moot.

Similar to trying to beat the market through market timing, the battle of wits Vizzini was engaging in was with himself. Westley instead played the game right by avoiding the game of wits by doing work beforehand. This is exactly what Graham prescribed for investing.

Graham felt through the deep fundamental analysis of individual securities an investor could know with a reasonable degree of confidence what the price/value of a security should be. This value is adjusted to new information that fundamentally changes the business prospects, but most often the investor just patiently waits for Mr. Market to make a mistake. Like Westley, the intelligent investor just waits for Vizzini to drink.

The moral of the story is that to outperform the market you must either do your homework (independent analysis to make yourself immune to the poison of market noise) or do not play the game at all (buy and hold a proper asset allocation and ignore the market noise). In neither case, do you try to use your own emotional intuitions to outthink and time the market.

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.

Machine Learning’s Growing Pains

Solomon_B 150x150Brad Solomon, Junior Investment Analyst

“Machine learning,” on its surface, sounds nothing short of miraculous.  For anyone who has ever felt overwhelmed when working with a large amount of intractable data, it evokes a certain fantasy: press a button, and let the machine learn. Poof, without any further instruction, your computer spits out relationships in the data seemingly untraceable to the human eye.

Yet paradoxically, there is also a competing perception that only a certain breed of mathematics PhDs and programming prodigies are worthy of using machine learning (ML) techniques.  The field of computer science has never been short on patronization; this post recommends first making sure that you have several advanced degrees and then learning the C or C++ languages, both of which are seen as some of the least user-friendly computer languages and neither of which are the language into which most machine learning is actually incorporated.

Now that machine learning has made its way to the top of Gartner’s Hype Cycle for emerging technologies, and has also become pervasively marketed as part of the tool set of quantitative investment strategies, it’s probably a good time to debunk some misconceptions about what machine learning is, and what it isn’t.

Let’s start with a positive.  ML encompasses a wide range of statistical modeling techniques that can be applied toward facial recognition, predicting credit card fraud, and classifying tumors as malignant or benign, to name just a few implementations.  At the heart of machine learning are a number of different models that all serve as means to the same ends: predicting a value or classifying something categorically.  The list of models themselves is an intimidating mouthful: to name a few, there are neural networks, decision trees, Bayesian ridge regression, and support vector machines.

If your head is spinning, you’re not alone.  However, you might be surprised to learn that you likely covered some elements of machine learning in any introductory statistics course: for instance, ordinary least squares regression (linear regression) also falls under the hood of machine learning. Machine learning practitioners also like to throw around a number of fancy terms that go by other names elsewhere in the realm of broader statistics discipline.  For example, training and test data are analogous to the more familiar terms in-sample and out-of-sample; supervised learning simply means that you are starting with an independent and dependent variable and want to establish a relationship between the two and then apply that relationship to a “fresh” (test) variable.

Now, to debunk one of several myths: ML is not new; the term was coined in 1959 and has been used pervasively in the tech industry for decades.  However, growth in the popularity of the Python programming language, which is open-source, free, and offers a number of user-friendly machine learning packages, has fueled interest in the concept.

One result has been the proliferation of machine learning techniques and their (purported) use in quantitative investment applications.  At Brinker, we’ve come across more than a handful of managers using machine learning: the use of random forest classification to identify the likelihood that a company will cut its dividend, or forecasting of market volatility regimes through Markov chain Monte Carlo methods.  However, we would be remiss to mention that for every manager that usefully employs machine learning, there are a half-dozen others that simply like being able to include it in a slide in their strategy’s pitch-book.  Bloomberg bluntly articulated this recently: “Hedge Funds Beware: Most Machine Learning Talk Is Really ‘Hokum’.”  A healthy dose of skepticism is warranted.

That engenders a second key point: when interacting with managers who profess to use ML in their everyday process, ask as many “dumb” questions as possible.  In layman’s terms, can you describe what’s going on “under the hood”?  Why did you select this model in particular?  While the mathematics behind certain models can be quite hairy, the high-level intuition should not be.  And lastly, while machine learning hasn’t yet been fully commoditized, that doesn’t mean you should be paying a 2 & 20 fee to access its capabilities.

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.

Hacking human nature

O'HaraJim O’Hara, CISM, CISSP, CEH, Information Security Officer

As organizations have improved the technical controls protecting their assets, hackers and fraudsters have adjusted their aim – to human nature.  Why spend countless hours picking at an impenetrable lock when, with a little trickery and sleight of hand, the owner will happily provide the key?  Why don black clothing and a ski mask to risk life and limb committing a crime when you can perpetrate the same act more effectively from your couch?  In your pajamas.

Social engineering attacks have risen to levels not seen since 2004. Attackers prey on a victim’s complacency, good nature, and desire to please.  All characteristics inherent to human nature.

A-phishin’ we will go…

Far and away the most prevalent form of social engineering, email Phishing, has become the fraudster’s weapon of choice.  These types of attacks are relatively simple to perform, and enjoy an incredible return on investment.

Fraudulent email accounts can be created in seconds, at no cost.  Key organizational contact information is just a web search away, often listed on the victim’s own website or social media profile.  Fake websites can be constructed in minutes and hosted for less than a dollar a day.  Each of these elements combine to represent a highly effective and efficient tool for theft.  Theft of identities, reputations, intellectual property, and cold hard cash.

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Email phishing attacks typically have one or more of the following characteristics:

  • The email sender appears to be an individual or entity known to the victim. In many cases, the “friendly name” of the sender is identical to an advisor, associate, or organization familiar to the victim.  Only through closer inspection does it become apparent that the actual address used by the sender is fake.
  • The email content appears to be of a pressing, urgent nature. When given a time constraint, humans are more likely to leave caution to the wind, set aside better judgement, and bypass normal procedures.  Attackers often attempt to create a sense of urgency in order to exploit this aspect of human nature.
  • The email contains links. Phishing emails often contain links to fraudulent or malicious websites.  Fraudulent websites are often spot-on doppelgangers of their legitimate peers.  The attacker’s hope is that the victim will attempt to log onto the fake site, revealing their credentials, which the attacker will then use to access the legitimate site, or other accounts of the victim.  Malicious websites often contain malware designed to exploit weaknesses in the victim’s browser.  Once installed this malware may be used to collect credentials, log keystrokes, or perpetrate other criminal acts using the victim’s computer or device.

Protection must remain a top priority at all times

In an increasingly rapid service-on-demand digital age, clients expect transactions to take place almost instantly.  Advisors have a strong desire to please their client by meeting that expectation.  This is human nature.  Making a distribution happen quickly will please the client, and is a “win” for the advisor.  But is it still a win if that quick client distribution is executed based on fraudulent instructions and deposited to an account controlled by a hacker?

The key to thwarting social engineering attacks is recognizing that protecting your clients and their assets is your top priority.  Airline passengers hope to arrive at their destinations on time.  But they don’t fault the pilot for following the preflight checklist, avoiding dangerous weather, or getting clarification from air traffic control when the flight plan seems a little “phishy”.

How to protect yourself and your clients:

  • Be wary of email instructions. Email is the fraudster’s preferred tool because it is effective.  Email should never be relied upon as reliable and authentic.  Even messages from legitimate addresses are suspect, as the sender’s account may very well have been compromised.
  • Keep human nature in check. Instructions or requests attempting to impart a sense of urgency, requiring quick, atypical actions on your behalf should be regarded as especially suspect.  Recognize the potential intent of such tactics and stick to your regular procedures and processes.
  • Pick up the phone. It is highly recommended that advisors verify client distribution instructions in-person or via telephone.  Confirm the identity of your client, and ensure the instructions you’ve received are accurate.

At Brinker Capital we are committed to continually improving our technology and security policies in an effort to stay ahead of current cyber threats within the industry. Together, we can take steps to help keep client information safe.

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.

February 2017 market and economic review and outlook

magnotta_headshot_2016Amy Magnotta, CFASenior Investment Manager

Markets were off to a good start in 2017 as risk assets posted modest gains for the month. After taking a brief pause from the post-election fourth quarter rally, risk assets continued to climb at a more tempered pace, with returns driven more by healthy fundamentals than post-election hype. Economic data leaned positive and a solid earnings reporting season helped bolster consumer confidence. Inflation risk continued to increase with rising wages and stabilization of commodity prices and will likely continue to rise as the new political administration begins implementing its pro-growth policies.

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The S&P 500 was up 1.9% for the month. Cyclicals outperformed more defensive sectors with both materials and information technology up over 4%. Energy was down -3.6%, a reversal from the sector’s strong returns in 2016. Telecom was down -2.5% as income-focused stocks continue to experience pressure from the rise in interest rates. Growth outperformed value and mid cap led small and large cap equities.

International equities were up 3.6% in January. Economic data in the European Union pointed to signs of a modest recovery as GDP growth rose and unemployment fell. Progress, however, remains uneven amongst countries, creating headwinds for the European Central Bank to implement future effective monetary policy. Likewise Japan saw beginning signs of an economic recovery but no indication was given that the Bank of Japan is ready to start tapering it’s accommodate monetary policy. Emerging markets were up 5.5%, outperforming developed international markets. After experiencing a drawdown in the fourth quarter last year, the asset class rallied due in part to stabilization of commodity prices.

Fixed income was slightly positive with the Bloomberg Barclays US Aggregate Index up 0.2% and Bloomberg Barclays Municipal Bond up 0.7%. The 10 year Treasury yield ended at 2.46%, relatively unchanged from the start of the month, but down from the 2.59% peak in mid-December of last year. High yield was the best performing sector, up 1.5%, as spreads slightly contracted. Going forward we expect fixed income returns to remain muted as the Fed continues with its interest normalization efforts.

The Brinker Capital investment team remains 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 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:

  • Reflationary fiscal policies: With the new administration and an all‐Republican government, we expect fiscal policy expansion in 2017, including 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 is ticking higher and there are signs growth outside of the U.S., in both developed and emerging markets, are improving.
  • Global monetary policy remains accommodative: The Federal Reserve is taking a careful approach to policy normalization. ECB and Bank of Japan balance sheets expanded in 2016 and central banks remain supportive of growth.

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

  • Administration unknowns: While the upcoming administration’s policies are currently being viewed favorably, uncertainties remain. The market may be too optimistic that all of the pro‐growth policies anticipated will come to fruition. We are unsure how Trump’s trade policies will develop, and there is the possibility for geopolitical missteps.
  • Risk of policy mistake: The Federal Reserve has begun to slowly normalize monetary policy, but the future path of rates is still unclear. Should inflation move significantly higher, there is also the risk that the Fed falls behind the curve. The ECB and the Bank of Japan could also disappoint market participants, bringing the credibility of central banks into question.

The technical backdrop of the market is favorable, credit conditions are supportive, and we have started to see some acceleration in economic growth. So far Trump’s policies are being seen as pro‐growth, and investor confidence has improved. We expect higher
volatility to continue as we digest the onset of the Trump administration and the actions of central banks, 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.

A PDF version of Amy’s commentary is available to download from the Brinker Capital Resource Center. Find it here >>

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.

Barclays Municipal Bond Index: A market-weighted index, maintained by Barclays Capital, used to represent the broad market for investment grade, tax-exempt bonds with a maturity of over one year. Such index will have different level of volatility than the actual investment portfolio. 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. World Index Ex-U.S. includes both developed and emerging markets. 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 the United States.

Brinker Capital Inc., a Registered Investment Advisor.

The road to interest rate normalization

lowmanLeigh Lowman, Investment Manager

“Lower for longer”; the motto heard repeatedly since the 2008 financial crisis may soon be irrelevant as interest rates have begun the much anticipated path of normalization. We believe interest rates are biased higher in the longer term as economic data leans positive, giving the green light for the Fed to resume its interest rate normalization efforts. As shown in the chart below, the recent December rate increase is likely the first in a series of hikes to occur over the next few years. However, the process of longer term rates moving higher will likely be prolonged and characterized in fits and starts, rather than linear, as the market adapts to the new normal.

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Source: FactSet, Federal Reserve, J.P. Morgan Asset Management. U.S. data are as of November 30, 2016. Market expectations are the federal funds rates priced into the fed futures market as of the date of the September 2016 FOMC meeting. *Forecasts of 17 Federal Open Market Committee (FOMC) participants are median estimates. **Last futures market expectation is for August 2019 due to data availability.

Many positive factors are currently present in the economy that point to a move toward interest rate normalization, including:

Stable U.S. economic growth – U.S. economic growth has been modest but steady.  The onset of the Trump administration will likely further stimulate the economy through reflationary fiscal policies including tax cuts, infrastructure spending and a more benign regulatory environment.

Supportive credit environment – Since the February 11, 2016 market bottom, high yield credit spreads contracted 431 basis points with most sector credit spreads now at or near one year market lows. Commodity prices have also stabilized.

Inflation expectations – Historically there has been a strong positive correlation between interest rates and inflation. Many of the anticipated policies of the Trump administration are inherently inflationary, and inflation expectations have increased accordingly. In addition, we believe we are in the second half of the business cycle, typically characterized by wage growth and increased capital expenditures, both of which eventually translate into higher prices.

Unemployment levels – The labor market has become stronger and is nearing full employment. Unemployment has dropped to a level last seen in 2007.

What does this mean for fixed income?

While a rising rate environment may suggest flat to even negative returns for some areas of fixed income, it still provides stability in the portfolio when equities sell off.  Historically, fixed income has had substantially less drawdown than equities. For example shown in the charts below, in the two days following the Brexit decision on June 23, 2016, equities sold off over 4% and fixed income was up sharply. Likewise fixed income provided an attractive safe haven during the market correction in the beginning of 2016. In an environment of rising rates, we expect fixed income to provide a good counter to equity volatility.

rate_chart_2_1-5-17

Source: FactSet

Although uncertainty remains on the timing and trajectory of interest rates changes, we believe interest rates are poised higher for the longer term. Brinker Capital is committed to helping investors navigate through a rising rate environment. All of our products are based on a multi-asset class investment philosophy, a proven method of achieving meaningful diversification

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.

 

 

 

 

 

 

 

 

 

Start the New Year off right: Resolve to read more

Solomon-(2)Brad Solomon, Junior Investment Analyst

Many New Year’s resolutions focus on developing healthy habits. An important one to keep is intellectual curiosity. In no particular order, below is a reading list for 2017. Some deal more directly with finance than others, but they each explore economic, sociopolitical, cultural and behavioral issues that are ultimately relevant to global markets.

  1. Nation on the Take: How Big Money Corrupts Our Democracy and What We Can Do About It. Wendell Potter & Nick Penniman, Bloomsbury Press, 2016.

Nation on the Take explores the evolution of lobbying in the United States and the increased role of money in politics following the Citizens United case of 2010. What is most satisfying about the book is the extent to which its authors manage to remain nonpartisan, calling out Republicans and Democrats alike. If your New Year’s resolution involves lowering your blood pressure, I advise against skipping over this suggestion.

  1. Hillbilly Elegy: A Memoir of a Family and Culture in Crisis. D. Vance, Harper Collins Publishing, 2016.

J.D. Vance’s Hillbilly Elegy details the disenchantment of Appalachia in a view that manages to be impartially critical but also remain in solidarity with the region. This book seems to be making its way onto every “essential reading” list, and deservedly so given its relevancy to the foundations of the new wave of populism that is still working its way across the globe.

  1. Nothing is True and Everything is Possible: The Surreal Heart of the New Russia. Peter Pomerantsev, Public Affairs Publishing, 2015.

While Charles Clover’s more recent Black Wind, White Snow overtly concerns itself with the Kremlin as its sole subject, Nothing is True is a wide-ranging, colorful firsthand account of the backwards elements of Russia’s culture. A poll of a certain political party recently showed that 37 percent of respondents view Vladimir Putin favorably, versus just 10 percent in July 2014. As America’s attitude towards Russia evolves, this book is a warning to think twice before offering such a seal of approval—a stark illustration of just how diametrically opposed many Russian norms are relative to those of the U.S.

  1. The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal. Ludwig Chincarini, John Wiley & Sons, 2012.

Chincarini’s The Crisis of Crowding could best be described as a mathematically detailed, focused version of Scott Patterson’s The Quants. The book analytically decomposes the 1998 collapse of Long-Term Capital Management and the 2008-09 Financial Crisis, exploring the common thread between them in that both resulted partly from incomplete pictures of risk in behaviorally erratic systems.

  1. Fortune’s Formula: The Untold Story of the Scientific Betting System That Beat Casinos and Wall Street. William Poundstone, Hill and Wang, 2006.

Like the preceding choice on this list, Fortune’s Formula is a technical treatise of a subject that often gets “glossed over” despite its critical importance to markets. The author manages to explore the mathematically weighty Kelly criterion in a boiled-down, coherent, and practically applicable framework.

  1. Personal Benchmark: Integrating Behavioral Finance and Investment Management. Chuck Widger and Daniel Crosby, John Wiley & Sons, 2014.

Financial advisors do their clients a great service by educating them about investing best practices, but at times of volatility, logic is often thrown out the window. As the authors wrote in the book, “While investor awareness and education can be powerful, the very nature of stressful events is such that rational thinking and self-reliance are at their nadir when fear is at its peak.” The authors provide a framework for embedding good behavior into the investment process.

  1. The Laws of Wealth: Psychology and the Secret to Investing Success. Daniel Crosby, Harriman House, 2016.

And if you are looking for a list of rules to follow in the year to exercise good investing behavior, The Laws of Wealth helps keep you on the straight and narrow. The book provides clear, concise direction on what investors should think, ask and do.

Once you finish these books, more books can be found from the recommended lists by The Economist, Financial Times, and Bloomberg

Enjoy, and happy New Year!

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.

 

 

Providing care without sacrificing goals

John_SolomonJohn SolomonExecutive Vice President, Wealth Advisory

In what should be peak earning years, many employees of American business owners encounter family situations that make it difficult to save for retirement at planned levels. As parents and grandparents live longer and medical and long-term care expenses continue to rise, millions of Americans are providing care to ensure elderly loved ones can remain at home.

The number of adult children who provide personal care and/or financial assistance to a parent has more than tripled in the last 15 years. Currently, 25% of adults, mostly Baby Boomers, provide some care to a parent.[1]

On average, most caregivers are women (66%) who are 49 years old, married and employed.[2]  Being a caregiver means attending appointments, providing hands-on support, and “checking-in” often during work hours, making it difficult to juggle those duties with the demands of a career. No matter how flexible the schedule, caretaking obligations can negatively affect earning power and ultimately impact an employee’s ability to save for retirement. A national study of women who provide care reveals the struggle of balancing care and career:

  • 33% decreased work hours to provide care
  • 29% passed up a job promotion, training or assignment
  • 22% took a leave of absence
  • 20% switched from full-time to part-time employment
  • 16% quit their jobs
  • 13% retired early

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In addition to impacting the ability to save, caregivers often have to tap their savings to pay for the care of their loved one. Co-payments, prescription costs, food, transportation services, home heath aides, and home modifications typically are among the expenses caregivers cover to the tune of around $5,000 a year.

The family caregiver trend will only gain steam as each generation’s life expectancy elongates. Here are helpful tips from for your employees that may be required to take care of their parents:

  • Establish an emergency savings account, pay off debt and maximize retirement savings opportunities before caregiving demands hinder your ability to do so.
  • Determine whether long-term care insurance is a viable option for your loved one.
  • Consider how you could approach siblings or other potential caregivers to discuss the emotional and financial realities of caregiving. Caregiving is a tremendous responsibility which has the potential of serving as a catalyst for family conflict in the absence of clear communication and understanding.
  • Make a commitment to continue to save for retirement through either a traditional or Roth IRA or a Simplified Employee Pension.
  • Put safeguards in place to help you resist the temptation to spend your 401(k) or IRA money to pay caregiving expenses.
  • Engage with legal counsel who can help in executing the necessary legal documents, such as a durable power of attorney, health care proxy, living will, or living trust.

For nearly 30 years, Brinker Capital has followed a disciplined multi-asset class approach to build portfolios that integrate an investor’s investment objectives and goals to ensure that their assets are effectively meeting their needs. Brinker Capital Wealth Advisory provides customized portfolios for business owners, individual investors, and institutions with assets of at least $2 million. An overview is available of the services provided by Brinker Capital Wealth Advisory. Find it 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.

[1] The MetLife Study of Caregiving Costs to Working Caregivers. (June 2011). MetLife Mature Market Institute.

[2] Family Caregiver Alliance National Center on Caregiving. www.caregiver.org.

Happy Holidays from Brinker Capital

Noreen D. BeamanNoreen D. Beaman, Chief Executive Officer, Brinker Capital

I wanted to take a moment to wish all of our advisors, the clients they serve, our strategic partners, and all friends of Brinker Capital, a wonderful holiday season.

We are thankful for the many partnerships we have with you and the continued support you show us. We are looking forward to another year of commitment to taking great ideas and applying a strong discipline to provide better outcomes.

On behalf of Brinker Capital, Happy Holidays!

> Watch the video here


December 2016 market and economic review and outlook


magnotta_headshot_2016Amy Magnotta, CFASenior Investment Manager

The dramatic market shifts in November were not for the fainthearted. Risk assets ended the month mixed with domestic assets posting strong positive returns and international assets generally negative. November began with risk assets in a steady downtrend but abruptly reversed in the aftermath of the Trump victory. Markets surged with the anticipation of Trump policy initiatives such as increased infrastructure spending, tax reform and less regulation. Expectations of increased economic growth coupled with rising commodity prices heightened fears of higher inflation and continue to fuel speculation of a Fed rate hike during the fourth quarter. As political and central bank policy continue to unfold, we expect heightened market volatility to continue. 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.

Our macro outlook is biased in favor of the positives and recession is not our base case:

  • Reflationary fiscal policies: With the new administration and an all‐Republican government, we expect fiscal policy expansion in 2017, including tax cuts, repatriation of foreign sourced profits, and infrastructure spending, as well as a more benign regulatory environment.
  • Global monetary policy remains accommodative: The Fed’s approach to tightening monetary policy has been patient. The Bank of Japan and the ECB remain supportive, and the Bank of England may need to join in response to the Brexit vote.
  • Stable U.S. growth and tame inflation: U.S. economic growth has been modest but steady, and the reflationary policies discussed above should boost economic activity. Wage growth, a big driver of inflation, has remained in check.
  • Constructive backdrop for U.S. consumer: The U.S. consumer should continue to benefit from lower oil prices and a stronger labor market.

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

  • Risk of policy mistake: In the U.S. the subsequent path of rates is uncertain and may not be in line with market expectations, which could lead to increased volatility. Should inflation expectations move significantly higher, there is also the risk that the Fed falls behind the curve. The ECB and the Bank of Japan could also disappoint market participants, bringing the credibility of central banks into question.
  • Slower global growth: Economic growth outside the U.S. is weaker.
  • Risk of more protectionist trade policies: The new administration may impose tariffs and/or renegotiate trade agreements.

The technical backdrop of the market has improved, as have credit conditions, helped by the favorable macroeconomic environment. We have also seen some reacceleration in earnings growth. So far Trump’s policies are being seen as pro‐growth, and investor confidence has improved.

We expect higher volatility to continue as we digest the actions of central banks and the onset of the Trump administration; 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.

A PDF version of Amy’s commentary is available to download from the Brinker Capital Resource Center. Find it here >>

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. Brinker Capital Inc., a Registered Investment Advisor.

Investment Odyssey

Dan WilliamsDan Williams, CFA, CFP, Investment Analyst

In Homer’s Odyssey there is a memorable section where Odysseus and his crew must shutterstock_369235274sail past the island of the lovely Sirens. He has been warned to plug his crew’s ears with wax so that they will not be susceptible to the Sirens’ call. However, wishing to hear the Sirens’ calls for himself, he orders his men to tie him to the mast of the ship and ignore his future orders until they are clear of the island.

The need to stay the course and to ignore distractions are relevant to many facets of life, but I find special meaning related to long-term investing. When people think of investment risk they normally focus on the volatility seen in recent investment returns. However, the returns of a random month, quarter or even a year has an overrated impact on an account’s growth over a 10+ year horizon.

Tolerance for this volatility/risk typically has more to do with investor psychological make-up than the mathematical impact of these short-term returns on much longer term account performance. For me, this volatility and other market noise represent the Sirens that threaten to take investors off course. Two investors who are the same in every other way and invest in the same portfolio, will have a different investment experience based on how often they look at their account and how they feel about what they see.

In other words, similar to Odysseus’ crew, the journey can be made less stressful and easier by turning off the noise. While feelings and emotions are important considerations, as lost sleep and stress meaningfully impact a person’s well-being, a better course is set by focusing on more objective investment risks. Among the most relevant objective risks for investors is shortfall risk.

Shortfall risk

Most investors invest to fulfill a future goal/need years in the future. Shortfall risk is simply the risk that the money allocated and invested to this future goal/need proves to be inadequate to pay for it when the time comes. This risk is very real and goes well beyond how an investor feels about it. If an investor needs $100,000 a year in retirement but finds that due to insufficient account growth he or she can only sustainably take out $80,000 a year from his or her portfolio at retirement, the math will simply not work. No solace is offered by the smooth but inadequate investment journey of an overly conservative allocation when the investment goal is not achieved.

Addressing volatility

The challenge is often to achieve the long-term returns that can meet account balance requirements, volatility must be taken on. While Odysseus could have taken a long detour around the island of the lovey Sirens, his goal of getting home in a timely fashion would not have been met (and for those who know the story, he had a deadline). Similarly, an investor could ensure a very smooth investment journey by investing in a portfolio dominated by short-term bonds, but could find investment account growth inadequate to meet the goal of the investment. The good news is that if investors can find a way to plug their ears to the noise, they can get the longer-term returns they need and minimize the stress of the volatility along the way.

Multi-asset class goals-based investing is one way to have the investor take a longer view on his or her investing to see past the present sirens of volatility and recent returns to the goal at the end of the investing horizon. Without the ability to take the long-run prospective, we are like Odysseus hearing the Sirens call. Without an advisor to keep the ship on course, the journey is potentially doomed. Investing is only successful if the investor can stay the course and stay invested. The importance of keeping the investor from letting the heart rule the head is one of the most important roles of the investment advisor.

Brinker Capital understands that investing for the long-term can be daunting. That’s why we are focused on providing multi-asset class investment solutions that help investors manage the emotions of investing to achieve their unique financial goals.

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.