Investment Insights Podcast: Will the drama in Washington, DC upend the economic recovery and market rally?

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

On this week’s podcast (recorded June 2, 2017), Tim addresses a question top of mind for many investors.

Quick hits:

  • When it comes to politics, Brinker Capital is agnostic. Our focus is on understanding the economic and political environment we are operating in, while best positioning our portfolios regardless of the party in power.
  • We see the Trump Administration’s agenda as largely supportive of an optimistic outlook on the U.S. economy and market.
  • If Republicans fail in advancing their legislative agenda, risk assets should still benefit from two significant political tail winds:
    1. A more benign regulatory environment
    2. Certainty around federal tax rates
  • While the economic recovery and bull market are both long lived, we continue to see the weight of the evidence as supporting further expansion and price gains.

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 – July 10, 2015

Bill MillerBill Miller, Chief Investment Officer

On this week’s podcast (recorded July 7, 2015):

What we like: Harvard study shows when there’s debt relief as part of the solution, countries tend to recover and thrive more quickly

What we don’t like: The emotional impact the Greek crisis has on investors, chiefly contagion and anger

What we’re doing about it: Touting behavioral finance; investors shouldn’t allow this anger or fear to dictate their investment decisions; encouraging the themes found in Personal Benchmark: Integrating Behavioral Finance and Investment Management 

Click here to listen to the audio recording

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.

 

Investment Insights Podcast – April 15, 2015

Bill MillerBill Miller, Chief Investment Officer

On this week’s podcast (recorded April 10, 2015):

What we like: More talk about a global synchronized recovery; U.S. driving global growth; more positive news out of Europe, Japan, and India; China’s better-performing stock market

What we don’t like: Higher equity valuations in U.S., meaning stock market has marched upward; earnings estimates in first quarter have ratcheted down; first quarter may be a temporary slowdown or a sign of a bigger slowdown ahead

What we’re doing about it: Closely watching first quarter earnings; anticipating positive guidance from U.S. companies

Click here to listen to the audio recording.

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.

Eurozone Crisis Report Card

Ryan DresselRyan Dressel, Investment Analyst, Brinker Capital

In January 2013 Amy Magnotta wrote in detail about how the actions of the European Central Bank (ECB) finally gave the markets confidence that policy makers could get their sovereign debt problems under control.[1] The purpose of this blog is to measure the progress of the ECB’s actions, as well as other critical steps taken to resolve the Eurozone crisis.

Maintaining the Euro: A+
The markets put a lot of faith in the comments made by the head of the ECB Mario Draghi in July, 2012. Draghi stated that he would “Pledge to do whatever it takes to preserve the euro.” These words have proven to be monumental in preserving the euro as a currency. Following his announcement, the ECB still had to put together a plan that would be approved by the ECB’s governing council (comprised of banking representatives from each of the 18 EU countries)[2]. The politics of the approval essentially boiled down to whether or not each council member supported the euro as a currency. Draghi’s plan ultimately passed when Germany’s Chancellor, Angela Merkel, endorsed it in September 2012.[3] The stabilization of the euro boosted lending and borrowing for European banks, and allowed governments to introduce necessary economic reforms outlined in the plan.

Since the plan was approved, the euro’s value versus the U.S. Dollar has continued to rise; reaching levels last seen in 2011. There is still some debate as to whether or not the currency will last over the long term, but for now its stability has helped avoid the worst possible outcome (financial collapse). There are several key elections coming up over the next month, which could renew the threat of breaking up the currency if anti-EU officials are elected.

Government Deficit Levels: B
The average Eurozone government deficit came in at 3.0% in 2013, which was down from 3.7% in 2012. Budgets will need to remain tight for years to come.

Corporate Earnings: B
The MSCI Europe All Cap Index has returned 27.46% in 2013 and 5.01% so far in 2014 (as of last week). The Euro area also recorded first quarter 2014 GDP growth at +0.2% (-1.2% in Q1 2013).[4] This indicates that companies in Europe have established some positive earnings growth since the peak of the crisis. On a global scale, Europe looks like an attractive market for growth.

Dressel_EuroZone_ReportCard_5.30.14

Unemployment: C
Unemployment in the Eurozone has stabilized, but has not improved significantly enough to overcome its structural problems. The best improvements have come out of Spain, Ireland and Portugal due to a variety of reasons. In Ireland, emigration has helped reduce jobless claims while a majority of economic sectors increased employment growth. In Spain, the increased competitiveness in the manufacturing sector has been a large contributor. Portugal has seen a broad reduction in unemployment stemming from the strict labor reforms mandated by the ECB in exchange for bailout packages. These reforms are increasing worker hours, cutting overtime payments, reducing holidays, and giving companies the ability to replace poorly performing employees.[5]

Dressel_EuroZone_ReportCard_5.30.14_1[6]

There are also some important fundamental factors detracting from the overall labor market recovery. The large divide between temporary workers and permanent workers in many Eurozone countries has made labor markets especially difficult to reform. This is likely due to a mismatch of skills between employers and workers. High employment taxes and conservative decision-making by local governments and corporations have also created challenges for the recovery.

Additional Reading: Euro Area Labor Markets

Debt Levels: D
Total accumulated public debt in the Eurozone has actually gotten worse since the ECB’s plan was introduced. In 2013 it was 92.6% of gross domestic product, up from 90.7% in 2012. The stated European Union limit is 60%, which reflects the extremely high amount of government borrowing required to stabilize their economies.

Overall Recovery Progress: B-
On a positive note, governments are finally able to participate in bond markets without the fear of bankruptcy looming. Banks are lending again. Unemployment appears to have peaked and political officials recognize the importance of improving economic progress.

Unlike the 2008 U.S. recovery however, progress is noticeably slower. The social unrest, slow decision making, low confidence levels, and now geopolitical risks in Ukraine have hampered the recovery. When you consider the financial state of Europe less than two years ago, you have to give the ECB, and Europe in general, some credit. Things are slowly heading in the right direction.

The views expressed are those of Brinker Capital and are for informational purposes only. Holdings are subject to change.

[1] January 4, 2013. “Is Europe on the Mend?” http://blog.brinkercapital.com/2013/01/04/is-europe-on-the-mend/
[2]
European Central Bank. http://www.ecb.europa.eu/ecb/orga/decisions/govc/html/index.en.html
[3] September 6, 2012. “Technical features of Outright Monetary Transactions. European Central Bank.” http://www.ecb.europa.eu/press/pr/date/2012/html/pr120906_1.en.html
[4] Eurostat
[5] August 6, 2012. “Portugal Enforces Labour Reforms but More Demanded.” http://www.wsws.org/en/articles/2012/08/port-a06.html
[6] Eurostat (provided by Google Public Data)

Housing Recovery: Slow but Sustainable

Sheila BonitzSheila Bonitz, Vice President of Investment Management,
Brinker Capital

As we enter into the busiest selling season of the housing market (March – June), we are seeing signs of improvement within the housing industry as a whole. While many believe that the housing market is sustainable, it has not been a “V-shaped” recovery. Instead, it may be a long, slow road as the effects of the 2008 housing crisis are still fresh in everyone’s mind.

Positive signs for the housing industry:

U.S. Consumer Confidence

Source: FactSet

  • Mortgage delinquency rates are trending down, which is a positive for the economy.
  • Home prices are firming and increasing in some areas. The S&P/Case-Shiller Home Price Index increased +13% over the last 12 months.
  • Overall consumer confidence is increasing, and potential homebuyers are feeling better about buying a home.
  • Pent-up demand–we are well below the average of household formation since the 2008 crisis. Kids are living on the couch versus moving out.

What is different with this recovery?
Developers are much more strategic than what they were in 2006/2007. They are making purposeful, strategic decisions and are concentrating. Developers are focused on the A-market where the focus is on move-up buyers that are less sensitive to price and who have acceptable credit scores. Within the A-market, developers have flexibility with the price of the home. Slightly higher prices help to drive steady volume, which helps control inventory levels and provides steady work for the construction crews. The slightly higher home prices also give a lift to the developers’ operating margins.

Credit is still tight. The average FICO score for approved mortgage loans is 737, well above the 690 average we saw in the 2004-2007 period.

Potential homebuyers enter the housing market cautiously. With home prices on the rise again, they have concerns that their newly-purchased home value may fall sharply. 2008 clearly showed the world that there is no guarantee of generating a profit on the investment of a home. That being said, with interest rates at historic lows and with the cost of buying more advantageous than renting, we will see more people tiptoe their way back into the housing market.

Things to watch:

Mortgage Delinquency Rates

Source: FactSet

  • Does credit remain tight? Currently credit is tight. Wells Fargo* announced on 2/26/14 that they dropped their FICO minimum on FHA Loans to 600; Will other lenders follow Wells Fargo’s lead in lowering FICO minimums? If they do, we may see an increase in potential homebuyers.
  • Mortgage delinquency rates. Do they continue to trend down? If so, banks may be willing to lend.
  • Interest rate increase – gradual or sharp? The Housing market can absorb gradual interest rate increases, however; if we see another sharp increase like we did last summer, it will definitely have a negative impact on the housing market as a sharp increase in interest rates creates concern among potential homebuyers.
  • Monthly jobs report is trending up. As employment increases, the perceived pent-up demand will gradually bring more homebuyers to the market.
  • Supply. Housing supply has been low. Will there be an increase in supply for the spring selling season? Will it be met with increased demand to keep prices up?

Source: “Wells Fargo Lowers Credit Scores for FHA Loans,” National Mortgage News (Feb. 6, 2014)

The views expressed are those of Brinker Capital and are for informational purposes only. Holdings are subject to change.

Investment Insights Podcast – January 24, 2014

Investment Insights PodcastBill Miller, Chief Investment Officer

On this week’s podcast (recorded January 23, 2014):

  • What we like: Strong manufacturing data out of Europe; Global synchronized recovery.
  • What we don’t like: High-sentiment indicators; global markets fairly valued, but need to see faster growth to drive equity prices higher; China slowing
  • What we are doing about it: Minor hedging in some portfolios; buying in the U.S. and European markets; looking at underlying global synchronized recovery as powerful force.

Click the play icon below to launch the audio recording.

The views expressed are those of Brinker Capital and are for informational purposes only. Holdings are subject to change.

Investment Insights Podcast – January 14, 2014

Investment Insights PodcastBill Miller, Chief Investment Officer

On this week’s podcast (recorded January 13, 2014):

  • What we like: Global synchronized recovery
  • What we don’t like: Complacency (too much bullishness) associated with the global synchronization, making the market vulnerable to pullbacks.
  • What we are doing about it: Minor hedging in some portfolios; looking at underlying health of global synchronized recovery as central event, with sentiment as a secondary event.

Click the play icon below to launch the audio recording.

The views expressed are those of Brinker Capital and are for informational purposes only. Holdings are subject to change.

Monthly Market and Economic Outlook: November 2013

MagnottaAmy Magnotta, CFA, Senior Investment Manager, Brinker Capital

The impressive run for global equities continued in October. While U.S. and developed international markets have gained more than 25% and 20% respectively so far this year, emerging markets equities, fixed income, and commodities have lagged. Emerging markets have eked out a gain of less than 1%, but fixed income and commodities have posted negative year-to-date returns (through 10/31). While interest rates were relatively unchanged in October, the 10-year Treasury is still 100 basis points higher than where it began the year.

After the Fed decided not to begin tapering asset purchases at their September meeting, seeking greater clarity on economic growth and a waning of fiscal policy uncertainty, attention turned to Washington. A short-term deal was signed into law on October 17, funding the government until mid-January 2014 and suspending the debt ceiling until February 2014. With the prospects of a grand bargain slim, we expect continued headline risk coming out of Washington.

The Fed will again face the decision to taper asset purchases at their December meeting, and we expect volatility in risk assets and interest rates to surround this decision, just as we experienced in the second quarter.  More recent economic data has surprised to the upside, including a +2.8% GDP growth rate and better-than-expected gains in payrolls. Despite their decision to reduce or end asset purchases, the Fed has signaled that short-term rates will be on hold for some time. Rising longer-term interest rates in the context of stronger economic growth and low inflation is a satisfactory outcome.

11.12.13_Magnotta_MarketOutlook_1However, we continue to view a rapid rise in interest rates as one of the biggest threats to the economic recovery.  The recovery in the housing market, in both activity and prices, has been a positive contributor to growth this year.  Stable, and potentially rising, home prices help to boost consumer confidence and net worth, which impacts consumer spending in other areas of the economy.  Should mortgage rates move high enough to stall the housing market recovery, it would be a negative for economic growth.

We continue to approach our macro view as a balance between headwinds and tailwinds. We believe the scale remains tipped in favor of tailwinds as we approach the end of the year, with a number of factors supporting the economy and markets.

  • Monetary policy remains accommodative: The Fed remains accommodative (even with the eventual end of asset purchases, short-term interest rates are likely to remain near-zero until 2015), the ECB has provided additional support through a rate cut, and the Bank of Japan has embraced an aggressive monetary easing program in an attempt to boost growth and inflation.
  • Global growth strengthening: U.S. economic growth has been sluggish, but steady. The manufacturing and service PMIs remain solidly in expansion territory. Outside of the U.S. growth has not been very robust, but it is positive.
  • Labor market progress: The recovery in the labor market has been slow, but stable. Monthly payroll gains have averaged 201,000[1] over the last three months.
  • Inflation tame: With the CPI increasing only +1.2% over the last 12 months, inflation in the U.S. has been running below the Fed’s target level.
  • Equity fund flows turn positive: Equity mutual funds have experienced inflows of $24 billion over the last three weeks, compared to outflows of -$12 billion for fixed income funds.[2] Continued inflows would provide further support to the equity markets.
  • Housing market improvement: The improvement in home prices, typically a consumer’s largest asset, boosts net worth, and as a result, consumer confidence.  However, another move higher in mortgage rates could jeopardize the recovery.
  • U.S. companies remain in solid shape: U.S. companies have solid balance sheets flush with cash that could be reinvested or returned to shareholders. Corporate profits remain at high levels and margins have been resilient.

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

  • 11.12.13_Magnotta_MarketOutlook_2Fed mismanages exit: The Fed will soon have to face the decision of when to scale back asset purchases, which could prompt further volatility in asset prices and interest rates. If the economy has not yet reached escape velocity when the Fed begins to scale back its asset purchases, risk assets could react negatively as they have in the past when monetary stimulus has been withdrawn.  If the Fed does begin to slow asset purchases, it will be in the context of an improving economy.
  • Significantly higher interest rates: Rates moving significantly higher from current levels could stifle the economic recovery.
  • Sentiment elevated: Investor sentiment is elevated, which typically serves as a contrarian signal.
  • Fiscal policy uncertainty: Washington continues to kick the can down the road, delaying further debt ceiling and budget negotiations to early 2014.

Risk assets should continue to perform if real growth continues to recover even in a higher interest rate environment; however, we expect continued volatility in the near term, especially as we await the Fed’s decision on the fate of QE. Equity market valuations remain reasonable; however, sentiment is elevated. Our portfolios are positioned to take advantage of continued strength in risk assets, and we continue to emphasize high-conviction opportunities within asset classes, as well as strategies that can exploit market inefficiencies.

Some areas of opportunity currently include:

  • Global Equity: large cap growth, dividend growers, Japan, frontier markets, international microcap
  • Fixed Income: MBS, global high yield credit, short duration
  • Absolute Return: closed-end funds, relative value, long/short credit
  • Real Assets: MLPs, company specific opportunities
  • Private Equity: company specific opportunities

Asset Class Returns

11.12.13_Magnotta_MarketOutlook

Labor Market: Myths vs. Reality

Neil-DuttaThe following excerpt has been provided by Mr. Neil Dutta, Head of Economics at Renaissance Macro Research.

Myth #1: America is a nation of part-timers
Here is what is true: Over the last four months, part-time employment has expanded by 8.9% at an annual rate while full-time employment has risen at just a 0.5% annual rate. What is not true is that rising part-time work represents a new structural phenomenon in the U.S. labor market.

8.20.13_Dutta_RenMac_LaborMarketConsider the following points: part-time employment represents one-fifth of total household employment. A quick inspection of this series screams cyclical NOT structural. That is, the series rises during recessions and falls as the recovery gains traction. The Household Survey is notoriously volatile, so it makes sense to analyze longer-term trends. Over the last year, all of the increase in part-time employment has been for non-economic reasons (child care, vacation, schooling, training, etc.)

Why has this subject generated so much attention? Simple. The Affordable Care Act (ACA). However, there is little survey evidence that firms plan to materially alter worker hours because of the health law. A survey of firms across the New York Fed District found that only 12% of respondents refrained from hiring or shifted full-time workers into part-time; that compares to 7% that made minimal changes to their workforce. So, the ACA is having marginal impact, but it is overwhelmed by business cycle dynamics.

Myth #2: Job gains are all low wage
Earlier this month USA Today ran with the following headline, “Many new jobs are part-time and low-paying”. This is a true statement. Many of the jobs being created are low-paying and that may or may not be something to worry about. What is not true, however, is that this is a new development and unique only to this recovery.

8.20.13_Dutta_RenMac_LaborMarket_2The two sectors that get the most attention are retail trade and leisure & hospitality. So, we went back five economic cycles and looked at the composition of employment growth from the payroll trough to peak. Here is what we found: retail trade and leisure & hospitality employment, typically accounts for one-fourth of the job creation. In this cycle, 28.2% of the new jobs are in these categories. That compares to 28.4% in the 2003-07 recover, 23.4% in the 90s, 28.5% in the 80s, and 23.7% in the 70s.

More broadly, the narrative misses the fact the wages typically lag in employment recoveries. While the labor market continues to recover in a relative sense, there is still plenty of slack. What is important is that these unemployed workers here value. Otherwise, they would not be able to exert downward pressure on the wages of those working and the newly employed. That tells us the labor stack is cyclical not structural. As the labor recovery ensues and the slack is absorbed, wages will begin to rise. When growth bears fret about low-wage work, a more apt translation at this stage is: it is still early in the jobs recovery.

8.20.13_Dutta_RenMac_LaborMarket_3

The views expressed above are those of Neil Dutta and are not intended as investment advice.

Monthly Market and Economic Outlook – June 2013

Magnotta@AmyMagnotta, CFA, Senior Investment Manager, Brinker Capital

Financial market performance diverged in May. Despite selling off in the second half of the month as investors began to worry about the Federal Reserve tapering its asset purchases, U.S. equity markets delivered solid returns, with the S&P 500 gaining +2.1%. In the equity markets, high dividend oriented sectors (utilities, telecom, staples) delivered negative returns, as did interest rate sensitive sectors like REITs and MLPs. International equity markets declined in May and were negatively impacted by a stronger U.S. dollar. Emerging markets continue to lag developed international markets.

Interest rates moved higher in May, attempting to return to more normal levels. In the U.S., both the 10-year Treasury note and 30-year bond climbed over 40 basis points resulting in negative returns for all major income sectors. Year to date, U.S. fixed income markets (Barclays Aggregate Index) have declined -0.9% while U.S. equity markets (S&P 500) have gained over 14%.

06.07.13_Magnotta_MarketOutlook_1The fear of the Fed tapering its stimulus as early as September has continued to weigh on investors as we move into June. While equity market indexes are just 3% off the recent highs, we’re experiencing more volatility. The last two occasions when the Fed has attempted to pare stimulus, the equity markets experienced double-digit declines. However, if the Fed does follow through with reducing the amount of asset purchases, it will do so in the context of an improving economy. More recent economic data has been mediocre, the recovery in employment will continue to be slow, and inflation is falling and now well below the Fed’s target. Market participants will be focusing on every data point in an effort to predict the Fed’s actions.

Interest rates have come down slightly from recent highs, but the 10-year note remains above 2%. We expect to see more bond market volatility as interest rates attempt to return to more normal levels. However, with growth still sluggish and inflation low, we expect interest rates to remain range-bound over the intermediate term.

We continue to approach our macro view as a balance between headwinds and tailwinds. We believe the scale remains tipped in favor of tailwinds as we move through the second quarter. A number of factors should continue to support the economy and markets for the remainder of the year:

  • 06.07.13_Magnotta_MarketOutlook_2Global Monetary Policy Accommodation: The Fed remains accommodative (even if they scale back on asset purchases), the ECB has pledged to support the euro, and now the Bank of Japan is embracing an aggressive monetary easing program in an attempt to boost growth and inflation. This liquidity has helped to boost markets.
  • Housing Market Improvement: An improvement in housing, typically a consumer’s largest asset, is a boost to net worth and, as a result, consumer confidence. However, a significant move higher in mortgage rates, which are now above 4%, could jeopardize the recovery.
  • U.S. Companies Remain in Solid Shape: U.S. companies have solid balance sheets that are flush with cash that could be reinvested or returned to shareholders. Corporate profits remain at high levels and margins have been resilient.
  • Equity Fund Flows Turn Positive: Equity mutual fund flows turned positive in 2013, and while muted compared to flows into fixed income funds, remain a tailwind after several years of outflows. Investors experiencing losses on their fixed income portfolios could also be a driver of flows to equity funds.

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

  • Europe: The risk of policy error in Europe still exists. While the ECB is willing to act as a lender of last resort, the region has still not addressed its debt and growth problems.
  • Sluggish Global Growth: Europe is in recession while Japan is using unconventional measures to create growth. China is showing signs of slowing further, as is Brazil.
  • U.S. Fiscal Drag: While we achieved some certainty on fiscal issues earlier this year, drag from higher taxes and the sequester will weigh on personal incomes and growth this year.

06.07.13_Magnotta_MarketOutlook_4Because of massive government intervention in the global financial markets, we will continue to be susceptible to event risk. Instead of taking a strong position on the direction of the markets, we continue to seek high conviction opportunities and strategies within asset classes. Some areas of opportunity currently include:

  • Domestic Equity: dividend growers, housing related plays
  • International Equity: Japan, small & micro-cap emerging markets, frontier markets
  • Fixed Income: non-Agency mortgage backed securities, emerging market corporates, global high yield, short duration strategies
  • Real Assets: REIT Preferreds
  • Absolute Return: relative value, long/short credit
  • Private Equity: company specific opportunities

06.07.13_Magnotta_MarketOutlook