The road to interest rate normalization in 2017

Holland 150 x 150Tim Holland, CFA, Senior Vice President, Global Investment Strategist

Since 1965, the Fed has implemented policy tightening 15 times and the impact on the bond market has not always translated into longer rates rising. For example, in 2004 the Fed began raising rates in response to concerns of a housing bubble. As a result, the bond market did well as the yield on the 10-year Treasury fell.

More recently, during the current market cycle, the Fed increased rates by 25 basis points in December 2015. The 10-year Treasury yield fell and the bond market generated a positive return while equities plummeted in the first quarter of 2016. A year later, the Fed increased rates by 25 basis points in December 2016. The impact on markets was minimal with both equities and fixed income generating strong positive returns in the two months that followed. Year to date, equities and bonds have rallied in the face of two rate increases by the Fed; first in March and then in June. We expect one more rate increase in 2017.

shutterstock_124163875 resizedCatalysts for higher interest rates

Many positive factors are currently present in the U.S. economy that justify and support a move toward interest rate normalization:

  • Stable U.S. economic growth. U.S. economic growth has been modest but steady. The new administration and an all-Republican government will try to stimulate the economy through reflationary policies including tax cuts, infrastructure spending and a more benign regulatory environment.
  • Supportive credit environment. High yield credit spreads have meaningfully contracted and are back to the tight levels we saw in 2014.
  • 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 inflationary. In addition, the Brinker Capital investment team believes the economy is in the second half of the business cycle, which is typically characterized by wage growth and increased capital expenditures—both of which eventually translate into higher prices. We expect inflation expectations to move higher.
  • Unemployment levels. The labor market has become stronger and is nearing full employment. Unemployment has dropped to a level last seen in 2001.

A rising rate environment should prove challenging for some areas of fixed income.  However, fixed income can serve as the ballast for a broadly diversified portfolio and a good counter to equity market volatility.  Our fixed income exposure is focused on strategies with below average duration and a yield cushion.

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: Does Brexit still mean Brexit? The UK election result and what it means for the markets.

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

On this week’s podcast (recorded June 16, 2017), Tim addresses the political dynamic in the UK and the impact the recent election – and its rather surprising outcome – might have on Brexit and global markets.

Quick hits:

  • On June 8, U.K. voters went to the polls and confounded the experts and the pollsters by moving away from the ruling Conservative Party and embracing the Labour Party.
  • Despite all of the political drama, we still see Brexit moving forward and the U.K. exiting the European Union.
  • Near term, we also see the unexpected and unsettling U.K. election results potentially aiding pro EU, pro establishment political parties across Europe.
  • In the U.S., we don’t envision any meaningful economic or market impact from the political upheaval in the U.K.

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: 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: What’s right: The hard or soft data?

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

On this week’s podcast (recorded April 21, 2017), Tim addresses an ongoing stock market and economic debate that has been widely reported on by the media – “What’s right: the hard or soft data?”.

Quick hits:

  • One of the more contentious market topics of late has been the divergence between hard and soft economic data – and which data set is correct about near term and future economic performance.
  • Hard data refers to quantifiable economic data points such as GDP and retail sales. Soft data refer to surveys of how consumers and businesses feel about current and future economic prospects.  The former has been a bit disappointing of late while the latter has been coming in at multi-year highs.
  • We believe that ultimately the hard data will close the gap with the soft data, reflecting a strengthening economy. We would also point out that several hard data points reflect a robust US economy, including the unemployment rate.
  • We remain constructive on risk assets and see little in the way of typical excesses that would suggest a bear market or recession are imminent.

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.