Investment Insights Podcast: Outlook Positive Despite Rate Hike Possibility

magnotta_headshot_2016Amy Magnotta, CFASenior Investment Manager, Brinker Capital

On this week’s podcast (recorded September 9, 2016), Amy reviews how the markets performed during August and provides an outlook to what’s ahead. Here a few quick hits before you listen:

  • August was a relatively calm month for financial markets. Large cap developed market equities eked out small gains, while emerging markets, high-yield bonds and small caps fared better.
  • U.S. economic data releases have been mixed, but lean positive. Yet, with better economic data comes the possibility of an additional Fed interest rate hike sooner rather than later.
  • While the possibility of a rate hike could adversely affect markets in the near term, it doesn’t change our positive intermediate-term outlook.
  • Risks facing the economy include the potential for a central bank policy mistake, uncertainty surrounding the upcoming presidential election, and disappointing economic growth outside of the U.S.
  • We expect higher volatility to continue as we digest the actions of global central banks, but our view on risk assets still tilts positive over the intermediate term. Increased volatility often leads to pockets of attractive opportunities.

Click here to listen to Amy’s full 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. Brinker Capital, Inc., a Registered Investment Advisor.

Handling ETFs at the Brinker Capital Trading Desk

Joe PreisserJoe Preisser, Portfolio Specialist, Brinker Capital

In light of the continued media attention focused on the performance of certain exchange traded funds, during the equity market selloff at the end of August, we thought it prudent to discuss the steps we take here at Brinker Capital to ensure that all of the client orders entrusted to us are handled with the utmost care.

The price action seen across the exchange traded fund (ETF) landscape in late August, and in particular on the 24th, was nothing short of extreme, and is something our trading desk makes every effort to protect our client’s orders from.  We use our trading expertise and depth of experience to ensure that we make every effort to achieve the best executions available for our client’s orders.  ETFs have truly changed the investment landscape through their unique construction and, as a result, require a thorough understanding of their characteristics in order to effectively trade them. We pride ourselves on having gathered a great deal of knowledge, insight and experience in trading these instruments over the past five and a half years, and on having developed strong relationships with a number of well-respected trading desks on Wall Street to further enhance our expertise.

As many of the articles in the financial press discussed, there was a historic level of volatility during the first hour of trading on Monday, August 24, with much of the drastic price swings caused by the exorbitant number of trading halts that occurred across equity markets.  As an ETF is predominantly a simple reflection of the average price of its components, if those underlying constituents are halted, the ETF will not be priced appropriately by the market makers transacting in the security.  This problem can also occur on more mundane openings as well, as an ETF’s components open for trading at slightly differing times.  As a result of this phenomena, unless we have a very specific reason for trading an ETF during the first few minutes of a trading session—an ETF with European exposure would be an example of an exception—we will generally avoid trading during the first fifteen to thirty minutes of the session in order to allow for all of an ETF’s underlying holdings to open and the initial volatility to abate.  Although we did not have any active orders during the morning of August 24, if we had we would not have been transacting until the volatility abated.

shutterstock_70010218The strong relationships I mentioned earlier, with several of the most respected trading desks on Wall Street, allows us to leverage their expertise whenever we are moving into or out of a large position. We carefully examine every instrument we are asked to trade, and make our decisions on an individual basis as to what the best approach would be in order to minimize our impact on that instrument and to attempt to achieve the best possible executions.  Often, when we have a large order in an ETF, which itself is relatively illiquid, we will utilize the expertise of one of our trading partners to transact directly in the basket of securities that comprise the ETF in order to access the truly available liquidity and to minimize our impact on the security we are trading.  This strategy of course would not have helped on the 24th because it was the temporary illiquidity of the underlying securities that rendered the ETFs themselves illiquid, but I feel this example is important as it highlights the efforts we undertake in an effort to seek the best possible prices for our clients. In addition, a number of the articles discussing this episode highlighted the importance of imposing price limits while avoiding the use of “market” orders and this is a guideline we strictly adhere to.  Whenever we have a meaningful trade, we always set an appropriate limit, and will closely monitor the trade until its completion to ensure that the price does not deviate from the parameters which we put in place.

While this article has discussed our approach to ETF trading, we certainly apply the same level of expertise, care and attention to all of the client orders placed in our care, regardless of the investment vehicle.

Brinker Capital, Inc., a Registered Investment Advisor. 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.

Monthly Market and Economic Outlook: August 2014

Amy MagnottaAmy Magnotta, CFASenior Investment Manager, Brinker Capital

After pushing higher for most of July, the U.S. equity markets fell -2% on the last day to end the month in the red. Continued geopolitical concerns, a debt default in Argentina and a higher than expected reading on the Employment Cost Index could have provided a catalyst for the sell-off. Investor sentiment levels were elevated in July, so it is not surprising to have any bad news lead to a short-term pull-back in the equity markets. However, we believe equity markets are biased upward over the next six to twelve months and further weakness could be a buying opportunity.

U.S. small cap stocks have significantly lagged large caps so far this year. In July the small cap Russell 2000 Index declined -6.1%. The Russell 2000 is down -3.1% for the year-to-date period, compared to the +5.5% gain for the Russell 1000 Index. From a style perspective, value lagged growth in July but remains solidly ahead for the year-to-date period.

Developed Europe significantly lagged the U.S. equity markets in July, but Japan was able to deliver a positive return. Emerging markets continued their rally in July, gaining +2.0% for the month. Emerging markets have gained +8.5% through the first seven months of the year, well ahead of developed markets. Countries that struggled in 2013 due to the Fed’s taper talk, like India and Indonesia, have been very strong performers, while negative performance in Russia has weighed on the complex. The U.S. dollar has shown recent strength versus both developed and emerging market currencies.

New York Stock ExchangeU.S. Treasury yields edged slightly higher in July. The 10-year yield has fallen 56 basis points from where it began the year (as of 8/7/14), while the 2-year part of the yield curve has moved up eight basis points. As a result, the yield curve has flattened between the 10-year and 2-year tenors; however, it remains steep relative to history. While sluggish economic growth and geopolitical risks could be keeping a ceiling on U.S. rates, relative value could also be a factor. A 2.4% yield on a 10-year U.S. Treasury looks attractive relative to a 0.5% yield on 10-year Japanese government bonds, a 1.1% yield on 10-year German bonds, and a 2.6% yield on Spanish 10-year sovereign debt.

All taxable fixed income sectors were flat to slightly negative on the month. High yield fared the worst, declining -1.3% as spreads widened 50 basis points. Municipal bonds were slightly positive for the month and continue to benefit from a positive technical backdrop with strong demand for tax-free income being met with a lack of new issuance.

We approach our macro view as a balance between headwinds and tailwinds. We believe the scale remains tipped in favor of tailwinds, with a number of factors supporting the economy and markets over the intermediate term.

  • Global monetary policy remains accommodative: Even with quantitative easing slated to end in the fall, U.S. short-term interest rates should remain near-zero until 2015 if inflation remains contained. The ECB and the Bank of Japan are continuing their monetary easing programs.
  • Global growth stable: U.S. growth rebounded in the second quarter. Outside of the U.S., growth has not been very robust, but it is still positive.
  • Labor market progress: The recovery in the labor market has been slow but steady. The unemployment rate has fallen to 6.2% and jobless claims have fallen to new lows.
  • U.S. companies remain in solid shape: U.S. companies have solid balance sheets that are flush with cash. M&A deal activity has picked up this year. Corporate profits remain at high levels and margins have been resilient.
  • Less drag from Washington: After serving as a major uncertainty over the last few years, Washington has done little damage so far this year. Fiscal drag will not have a major impact on growth in 2014, and the budget deficit has also declined significantly.

Risks facing the economy and markets remain, including:

  • Fed Tapering/Tightening: If the Fed continues at the current pace, quantitative easing will end in the fall. Risk assets have historically reacted negatively when monetary stimulus has been withdrawn; however, this withdrawal is more gradual and the economy appears to be on more solid footing this time. Should inflation pick up, market participants will shift quickly to concern over the timing of the Fed’s first interest rate hike. Despite the recent uptick in the CPI, the core Personal Consumption Expenditure Price (PCE) Index, the Fed’s preferred inflation measure, is up only +1.5% over the last 12 months.
  • Election Year/Seasonality: While we noted there has been some progress in Washington, we could see market volatility pick up later this year in response to the mid-term elections. In addition, August and September tend to be weaker months for the equity markets.
  • Geopolitical Risks: The events in the Middle East and Russia could have a transitory impact on markets.

Risk assets should continue to perform over the intermediate term as we expect continued economic growth; however, we could see increased volatility and a shallow correction as markets digest the end of the Federal Reserve’s quantitative easing program. Economic data, especially inflation data, will be watched closely for signs that could lead the Fed to tighten monetary policy earlier than expected. Equity market valuations look elevated, but not overly rich relative to history, and maybe even reasonable when considering the level of interest rates and inflation. Investor sentiment, while down from excessive optimism territory, is still elevated, but the market trend remains positive. In addition, credit conditions still provide a positive backdrop for the markets.

Asset Class Outlook

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.

Source: Brinker Capital

Brinker Capital, Inc., a Registered Investment Advisor. 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. 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. Past performance is not a guarantee of similar future results. An investor cannot invest directly in an index