September 11, 2001: A day to remember

beaman 150 x 150Noreen D. Beaman, Chief Executive Officer

As today marks the 16th anniversary of the September 11 terrorist attacks, we remember those who lost their lives and honor those still fighting for our freedom. We grieve, empathize, and reflect on the day’s events that forever changed our country. From the pain of this unspeakable tragedy, American’s came together to build a stronger, more resilient community.

Since then, we continue to come together in times of adversity. Whether it be Hurricane Katrina, Super Storm Sandy or most recently, Hurricanes Harvey and Irma, the people of this country always can be counted on to reach out and help those in need.

In response to Hurricane Harvey’s destruction, Brinker Capital employees generously donated to the Houston Food Bank, which provided 36,960 meals to help those affected by Hurricane Harvey. Additionally, Brinker Capital will be taking new donations to help those who have been displaced by Hurricane Irma in the coming days.

On behalf of the Brinker Capital family, our thoughts are with the everyday heroes who have helped make our nation stronger today.

Investment Insights Podcast: Forgotten fundamentals

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

On this week’s podcast (recorded September 1, 2017), Tim discusses how recent current events are not fundamental to the market’s long-term performance.

Quick hits:

  • In the first half of 2017, the S&P 500 delivered year over year earnings growth of 12%, driven by double digit gains in both the first and second quarter.
  • The robust earnings performance of the S&P 500 is important for several reasons.
  • The underlying economic and market fundamentals are what matter most over the long term, and for the time being the news on both fronts is much more good than bad.

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.

Investing in Game of Thrones

Williams 150 X 150Dan Williams, CFA, CFPInvestment Analyst

Nothing else could make me, and many others, actually look forward to Sunday night like Game of Thrones. Of course I felt a need to draw some wisdom to the investment world from this show if for no other reason than I get to relieve my separation anxiety from the many months until the show comes back for its final season. Thankfully this season lends itself easily to the task.

For those unfamiliar with the show let me sum it up as briefly as possible (warning vague spoilers). There exists a continent called Westeros that is divided into numerous houses/kingdoms that swore fealty to the House that sits on the Iron Throne. In the recent past, there was a rebellion that disposed of the longstanding ruling House Targaryen and drove the surviving member(s) of the house off the continent into hiding. The show opens with a member of House Baratheon sitting on the throne. Well, that king gets killed “by accident on a hunting trip.” His best mate, who is head of House Stark, becomes involved in investigating the situation in the capital city and gets beheaded. House Lannister slides onto the throne by a member of the house being conveniently married to the former king. This whole situation causes much trouble as House Stark wants revenge, House Targaryen and Baratheon want to take back the throne, and the rest of the Houses see opportunity to reposition themselves. A bunch of people kill some other people by various methods. Some body parts get cut-off. Some dragons show up. Some people come back from the dead by unnatural methods. Really a classic story. So that is it.

Wait! I forgot! Up north there are reports of a huge frozen undead army being formed that threatens to sweep down and kill everyone. This threat is summed up as “Winter is coming.” No biggie, right? Oops!

GOT.Winter is Coming
The parallel that can be drawn to the investment world is that while people are chasing and comparing themselves to each other’s performance and asset class benchmarks, they take the eye off the primary goal – survival. The Houses all want more castles and the glory to sit up on the Iron Throne while John Snow, one of the show’s main protagonists who has been positioned up north for the majority of the show, said this season “If we don’t put aside our enmities and band together, we will die. And then it doesn’t matter whose skeleton sits on the Iron Throne.”

While we are not necessarily battling our neighbors – like the houses of Westeros – for bragging rights of investment returns, it is still the wrong struggle to have. The great threat to the north is our inability to meet our goals due to poor investment planning. We can go off track by spending too much or saving too little. We can take on too much or too little risk or invest in the wrong account types. We can be operating tax inefficient. We can fail to insure against the unlikely but devastating potential life events. Planning with an advisor should be focused on setting a path that provides the best likelihood for success against this enemy of insufficient assets for our goals rather than the bragging rights of a few year of investment returns.

During this season, attempts were made by John Snow to refocus the warring houses to the real threat of the north. This threat has been lurking for all seven seasons of the show and the big question is – is it too late for them? Similarly, the challenge of investment goal planning is easiest when taken on as early as possible or before winter comes. The adviser’s role is similar of that to John Snow’s, get their clients to start to properly prepare as early as possible for the threats that matter.

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.

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.


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.


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.


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.


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.