Investment Insights Podcast: Pointing towards a global re-acceleration

Hart_Podcast_338x284Chris Hart, Senior Vice President

On this week’s podcast (recorded December 12, 2016), Chris is back discussing how economic and market data have been more favorable and point towards a global re-acceleration.

Quick hits:

  • Risk assets continued to move higher
  • The past week saw a continuation of the “Trump Trade” where pro-growth and pro-cyclical areas of the markets fared best.
  • From an equity sector perspective, cyclicals such as Financials and Industrials continue to be the recipients of strong flows
  • Within fixed income, the credit backdrop remains supportive and treasury yields continue to rise.
  • Current expectations are for a hike in short term interest rates likely by 25 basis points
  • There is good participation across sectors and not the very narrow leadership environment we saw in 2015

For the rest of Chris’s insight, 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. Brinker Capital, Inc., a Registered Investment Advisor.

Investment Insights Podcast: Outlook moving forward

Raupp_Podcast_GraphicJeff Raupp, CFA, Senior Vice President

On this week’s podcast (recorded December 2, 2016), Jeff provides an outlook moving forward given the price action we’ve seen since the election. Here are some quick hits before you have a listen:

 

  • There have been some clear winners and losers in the markets since the election:
    • Winners: U.S. stocks
    • Losers: International stocks and the bond markets
  • We may move out of the muddle through economy we’ve been in over the last several years to one that looks more like a traditional second half of the business cycle

 

For Jeff’s full insight, 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. Brinker Capital, Inc., a Registered Investment Advisor.

Investment Insights Podcast: What a difference a week makes

Hart_Podcast_338x284Chris Hart, Senior Vice President

On this week’s podcast (recorded November 18, 2016), Chris is back discussing the swing in the markets that has ensued as a result of the election.

Quick hits:

  • By the end of the week, stocks posted gains of more than 5%, the largest weekly advance in two years.
  • However, we note that the rally has been massively rotational in nature rather than broad based.
  • Since the election, the dispersion of returns across has been high with equities moving higher and bonds selling off, domestic outperforming international, and small cap outperforming large caps
  • Much uncertainty remains ahead as the transition of U.S. leadership unfolds along with the strong probability of Fed action next month.

For the rest of Chris’s insight, 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. Brinker Capital, Inc., a Registered Investment Advisor.

April 2016 Monthly Market And Economic Outlook

Amy MagnottaAmy Magnotta, CFASenior Investment Manager, Brinker Capital

After an extremely volatile quarter, the broad equity market indexes ended just about where they started. Risk assets began the year under heavy pressure, with the S&P 500 Index declining more than -10% to a 22-month low on February 11. Concerns over the global growth outlook and the impact of further weakness in crude oil prices weighed on investors, and investor sentiment hit levels of extreme pessimism. Then we experienced a major reversal beginning on February 12, helped by a rebound in oil prices after Saudi Arabia and Russia agreed to freeze production, and more dovish comments by the Federal Reserve. Expectations regarding the pace of additional rate hikes by the Fed have been tempered from where they started the year.

All U.S. equity sectors ended the quarter in positive territory except for healthcare and financials. Dividend paying stocks significantly outperformed, resulting in a strong quarter for both the telecom and utilities sectors, and value indexes overall. From a market capitalization perspective, mid-caps outperformed both large and small caps, helped by the strong performance of REITs, another yield-oriented asset class.

Developed international equity markets lagged U.S. equity markets in the first quarter despite benefiting from a weaker U.S. dollar. Japan and Europe were particularly weak despite additional easing moves by their central banks, while the commodity-sensitive countries, such as Canada and Australia were positive for the quarter. Emerging markets outperformed U.S. equity markets for the quarter despite declines in China and India. Brazil was the strongest performer, helped by a rebound in the currency, expectations for political change, and the bounce in commodity prices.

ECBBonds outperformed stocks during the quarter, and did not even decline during the risk-on rally. Additional easing from the European Central Bank and a negative interest rate policy in Japan prevented U.S. bond yields from moving higher.

All fixed income sectors were positive for the quarter, led by corporate credit, which benefited from meaningful spread tightening, and TIPS, which benefited from their longer duration. Municipal bonds delivered positive returns, but lagged taxable fixed income.

We remain positive on risk assets over the intermediate-term; however, we acknowledge that we are in the later innings of the bull market that began in 2009 and the second half of the business cycle. The worst equity market declines are typically associated with recessions, which are preceded by aggressive central bank tightening or accelerating inflation, factors which are not present today. While our macro outlook is biased in favor of the positives and a near-term end to the business cycle is not our base case, the risks must not be ignored.

A number of factors we find supportive of the economy and markets over the near term.

  • Global monetary policy remains accommodative: Despite the Federal Reserve beginning to normalize monetary policy with a first rate hike in December, their approach is patient and data dependent. The Bank of Japan and the ECB have been more aggressive with easing measures in an attempt to support their economies, and China is likely going to require additional support.
  • Stable U.S. growth and tame inflation: U.S. economic growth has been modest but steady. Payroll employment growth has been solid and the unemployment rate has fallen to 5.0%. Wage growth has been tepid at best despite the tightening labor market, and reported inflation measures and inflation expectations, while off the lows, remain below the Fed’s target.
  • U.S. fiscal policy more accommodative: With the new budget fiscal policy is poised to become modestly accommodative in 2016, helping offset more restrictive monetary policy.
  • Solid backdrop for U.S. consumer: The U.S. consumer should see benefits from lower energy prices and a stronger labor market.

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

  • Risk of policy mistake: The potential for a policy mistake by the Fed or another major central bank is a concern, and central bank communication will be key. 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. Negative interest rates are already prevalent in other developed market economies.
  • Slower global growth: Economic growth outside the U.S. is decidedly weaker, and a significant slowdown in China is a concern.
  • Another downturn in commodity prices: Oil prices have rebounded off of the recent lows and lower energy prices on the whole benefit the consumer; however, another significant leg down in prices could become destabilizing.
  • Further weakness in credit markets: While high yield credit spreads have tightened from February’s wide levels, further weakness would signal concern regarding risk assets more broadly.

The technical backdrop of the market has improved, as have credit conditions, while the macroeconomic environment remains favorable. Investor sentiment moved from extreme pessimism levels in early 2016 back into more neutral territory. Valuations are at or slightly above historical averages, but we need to see earnings growth reaccelerate. We expect a higher level of volatility as markets assess the impact of slower global growth and actions of policymakers; however, our view on risk assets tilts positive over the near term. Higher volatility has led to attractive pockets of opportunity we can take advantage of as active managers.

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. 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.

60% of the Time, It Works Every Time

Solomon-(2)Brad Solomon, Junior Investment Analyst

“Bonds Show 60% Odds of Recession.”

It was a bold, slightly jarring headline to an article I happened across one recent morning. I had done a solid minute of skimming before I scrolled back to the top and noticed the published date—October 22, 2011.  If the models cited in the article had bet their chips on red, so to say, then the U.S. economy continued to hit black for some time.  Over the next four years, the domestic unemployment rate nearly halved while the S&P 500 returned a cumulative 84%.  Say what you want about much of that return being multiple expansion (84% total return on cumulative earnings per share growth of 16%)—it would’ve been a tough four years for investors to sit on the sidelines.

I’m writing this from an investment perspective rather than an academic one, but it is still a preoccupation for both fields to monitor to the economy.  Why?—because, as quantified by Evercore ISI, S&P 500 bear markets have been more severe (-30%) when they predate what actually morphs into an economic recession versus times when dire signs of economic stress do not ultimately turn up (-15%).

The world is once again on “recession watch” in 2016; signs of financial strain include the offshore weakening of China’s yuan, widening credit spreads, an apparent peak in blue chip earnings per share, and spiking European bank credit default swaps (CDSs).  One telling recession indicator, yield curve inversion, has seemingly not reared its head.  As measured through the difference between 10-year and 3-month Treasury yields, the spread today stands around 150 basis points, while it has fallen like clockwork to zero or below prior to each U.S. recession since 1956. (Recessions are indicated by the shaded grey areas below, as defined by the NBER.)

Source: The Federal Reserve, Brinker Capital

Source: The Federal Reserve, Brinker Capital

A number of commentators have raised concerns that the statistics above should not warrant an “all clear” sense of thinking there won’t be a recession.  In full awareness of the folly of claiming that “this time is different”—well, this time may be different.  Breaking down the term spread into its two components—the yield on a shorter-dated bill and longer-dated bond—the short rates have been artificially held down by a zero-bound federal funds rate for the past six years, while the feature of positive convexity that is inherently more pronounced for long rates means that it is, in theory, very tough to close the gap” on the remaining 150 basis point spread that would indicate an inverted yield curve mathematically.  (A convexity illustration is shown below—the takeaway is that the yield-price relationship becomes asymptotic at high prices, meaning that the 10-year note would need to be exorbitantly bid up to bring its yield down to equate with much shorter maturities.)

Source: Brinker Capital

Source: Brinker Capital

So, what are the odds of a recession?  If it’s not clear yet, I’m not writing this to assign a current probability but rather to warn against viewing such a figure in isolation.  Following the logic illustrated in papers such as this one, statistical programs make it possible to truly fine-tune a model: plug in any number of explanatory vectors (time series variables such as industrial production or unemployment claims) and “fit” the historical data to the response variable, which is essentially a switch that is “on” during a recession” and “off” when not.  But as calibrated as the model becomes, there is still subjectivity involved: what is the proper “trigger” for alarm?  Should your reaction to a 70% implied probability be different from your reaction to a 60% reading?  An important consideration is the objective behind such a model in the first place—to create a continuous distribution (infinite number) of outcomes and assign a probability to a discrete event (red or black, recession or no recession).  When framed this way, often it is the unquantifiable, intangible narratives and examination of what’s different this time (rather than what looks “the same”) that can create a fuller picture.

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.

Happy New Year?

Stuart QuintStuart P. Quint, CFA, Senior Investment Manager & International Strategist

Although we are only nine business days into 2016, markets have gotten off to a rough start. As of January 13, 2016, the S&P 500 was down -7.7% while a moderate-risk[1] benchmark was down -4.2%. In fact, this year has seen the worst start to any calendar year on record.

Unlike past corrections, the catalyst for the recent sell-off in markets is less obvious. One thought is that we are seeing a delayed response to the Federal Reserve’s December rate hike. Markets appear displeased with the timing of the Fed’s action, given the stalling economic growth. In our opinion, the Fed should have considered raising rates a year ago when economic growth was stronger.

Another consideration, it’s conceivable that investors are finally grasping the reality of slower growth in China. This is a factor that we have monitored for quite some time (and a factor in being underweight large emerging markets); but, the timing as to why the markets are worrying about China now is less clear.

There are other factors, too, that might be contributing to the downbeat mood in markets:

  • Slowdown in the Chinese economy and continued devaluation of its currency
  • Continued weakness and flight of capital in emerging markets
  • Weak oil prices (lower capital spend offsetting benefit to consumers)
  • Narrow leadership of U.S. equities (e.g. “FANG” stocks driving markets – high valuation, momentum, expectations with little room for disappointment)
  • Selloff in high-yield bonds
  • Continued deterioration in U.S. and global manufacturing
  • Strengthening of U.S. dollar and its corresponding hit to corporate earnings
  • Ongoing weakness in corporate revenue growth and economic growth
  • 2016 U.S. presidential elections
  • Disappointment in global central bank actions (Europe, Japan, China)

While the picture painted above seems saturated in negativity, it’s not all doom and gloom. There are assuredly some more positive factors to consider:

  • Global policy remains accommodative, particularly in Europe and Japan
  • U.S. interest rates remain low by historic standards
  • Job creation in the U.S. remains positive
  • U.S. bank lending continues to grow at moderate pace
  • U.S. services (majority of U.S. economic activity) continue to show moderate growth
  • Looser U.S. fiscal policy should marginally contribute toward GDP growth in 2016 (estimated)
  • Economic growth in Europe appears stable, albeit tepid
  • Direct impact of emerging market weakness to U.S. economy is less than 5% of GDP

In terms of how we address this in our portfolios, we continue to monitor these conditions and are assessing the risks and opportunities. Within our strategic portfolios, such as our Destinations mutual fund program, we have marginally reduced stated risk within more conservative portfolios while maintaining a slight overweight to risk in more aggressive portfolios. Following the trend of the last several years, we have trimmed exposure to riskier segments, such as credit within fixed income and small cap within equities. Tactical portfolios entered the year with neutral to slightly-positive beta on near-term concerns of high valuations and China.

The S&P 500 has dominated all asset classes in recent years.  A potential end to that reign should not cause alarm, but instead refocus attention to the long-term benefits of diversification and why there are reasons to own strategies which do not just act like the S&P 500.

In general, investors should not panic but rather continue to evaluate their risk tolerance and suitability, as well as engage in consistent dialogue with their financial advisors. The turn of the calendar might just be the ideal time to review those needs.

[1] Theoretical benchmark representing 60% equity (42% Russell 3000 Index, 18% MSCI AC ex-US), and 40% fixed income (38% Barclay Aggregate and 2% T-Bill)

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.

Early Concern in 2016 Yields Opportunity

Miller_HeadshotBill Miller, Chief Investment Officer

Overall global economic concerns and yesterday’s market events present a great opportunity to remind investors to stay focused on their goals. To that end, we highlight two performance metrics:

First, as illustrated below, some asset classes, including gold, U.S. Treasury bonds, TIPs and pipeline Master Limited Partnerships, finished up yesterday in the face of poor global equity performance. In some cases, this is the opposite of last year’s performance. Such a flip-flop in performance across asset classes only serves to highlight the value of Brinker Capital’s multi-asset class investment philosophy. A commitment to diversification can help calm investors on bad days and moderate enthusiasm on good days.

Performance Across Asset Classes

Source: Brinker Capital, FactSet

Second, big drops in the S&P are infrequent but certainly not an unfamiliar occurrence on an absolute basis. There have been single-day dips of 2% or greater in the S&P 500 a total of 222 times in the trailing 20 years, or just slightly under 5% of the total number of trading days.

More importantly, following these dips the median S&P return in the following month (2.44% over the subsequent 20 trading days) has been more than double that of the median 20-day S&P return over the period on a non-conditional basis (1.01%).

Over the last 20 years, a strategy that fled to cash for 20-day periods following those 2% S&P 500 declines would have fared 2% worse on an annualized basis than staying 100% invested in equity. That’s a cumulative return difference of 151%.

S&P 500 Performance

Source: Brinker Capital, FactSet

Again, yesterday’s volatility presents a great opportunity early in 2016 to remind investors that it’s not time to panic–it’s important to stay focused on their goals. While we can’t predict what specifically may happen in the future, Brinker Capital has been identifying trends and leveraging our six-asset class philosophy when positioning our portfolios to anticipate a period of increased market volatility in many of our strategic and tactical portfolios.

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.

It’s Official: China’s Currency Admitted to IMF Major Leagues

Stuart QuintStuart P. Quint, CFA, Senior Investment Manager & International Strategist

Here are the quick takes:

  • The IMF formally approved inclusion of the Chinese renminbi (RMB) into Special Drawing Rights (SDR)
  • Chinese RMB will not replace the U.S. dollar (USD) in the near term
  • Impact more symbolic near term, but progress will be measured over many years

The IMF formally indicated on November 30 it would include the Chinese RMB into its basket of approved reserve currencies. As stated in a previous blog, the inclusion of the RMB would appear to have limited near-term economic impact to the U.S. dollar.

Even with limited economic near-term impact, the inclusion of the RMB certainly has symbolic significance. Clearly, there is political benefit to the IMF’s recognition of the RMB in terms of enhancing China’s global prestige. The inclusion of the RMB might also serve as a carrot to deepen further structural reform as evidenced by China’s promise to have fully open capital accounts by 2020.[1]   Other countries hostile to the U.S., such as Russia and Iran, might view RMB investment as a way to hedge themselves against the risk of U.S.-led economic sanctions by conducting more trade away from the U.S. dollar.

However, the overall effects of the IMF SDR should not be overstated. The SDR is akin to a “recommended list” that cannot be enforced on central banks or markets. As an example, the weight of the USD was basically held flat at around 41%. (The new RMB weight was added at the expense mostly of the EUR). Furthermore, current holdings of central bank reserves deviate quite a bit from the SDR, with USD comprising 60% of total reserves (vs. 41% weight in the IMF SDR).[2] For comparison, central banks hold roughly 20% of reserves in EUR (vs. 31% weight in the IMF SDR). Some central banks hold currencies such as the Australian dollar (AUD) that are not in the IMF SDR.

Major potential shifts into the RMB will take place over a protracted period of years, but here are some milestones to watch:

  • Progress on further structural reform
  • Deeper liquidity in local Chinese bonds
  • Longer track record on responsible governance.

[1] http://www.bloomberg.com/news/articles/2015-10-22/china-said-to-weigh-pledge-for-opening-capital-account-by-2020-ig1sbvez .

[2] http://www.wsj.com/articles/proportion-of-euros-held-in-foreign-exchange-reserves-declines-1435686071

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.

China Currency Admitted to IMF Major Leagues: The End of U.S. Dollar Supremacy?

Stuart QuintStuart P. Quint, CFA, Senior Investment Manager & International Strategist

On November 13, the International Monetary Fund (IMF) gave a preliminary indication that it would include the Chinese currency, the RMB, for the first time in its basket of approved reserve currencies, or Special Drawing Rights (“SDRs”). Undoubtedly, China has gained international prestige due to its partial liberalization of its capital accounts as well as its position as the second largest economy in the world after the U.S.

Does this mean the end of the supremacy of the U.S. Dollar?

60% of reserves of foreign central banks are held in U.S. Dollars.[1] Chinese RMB comprise less than 1%. While foreign central banks are likely to accumulate more RMB over time, there remains some questions as to how quickly it could rise in the near term.

First, Chinese bond markets would need to develop deeper liquidity. In order to invest in a currency, central banks would demand liquid investments denominated in the currency. Today, the U.S. bond market is magnitudes deeper than that in China.[2]

Second, it’s not in China’s best interest to immediately go to fully-free capital accounts. Exports are in decline due in part to weak global demand. The last thing the Chinese government would want to do is to put further pressure on exporter margins with a strong currency buttressed by sudden foreign capital inflows. One case in point is the August devaluation of the Chinese RMB that spooked financial markets.

While China has made progress in financial reform—partial liberalization of interest rates and opening up access to its stock markets—China has not opened up its currency to full convertibility and free capital flows.

Furthermore, recent government intervention in the stock market and economy does not provide investors assurance on long-term governance. Neither the Chinese nor the IMF can simply legislate a track record of responsible governance overnight. Time and consistency are needed to win investor confidence.

[1] http://worldif.economist.com/article/6/what-if-the-yuan-competes-with-the-dollar-clash-of-the-currencies , accessed on November 13, 2015.

[2] See http://www.wsj.com/articles/why-investors-shy-away-from-chinas-6-4-trillion-bond-market-1437593482?alg=y , accessed on November 16, 2015.

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, a Registered Investment Advisor.

Investment Insights Podcast – August 5, 2015

miller_podcast_graphic Bill Miller, Chief Investment Officer

On this week’s podcast (recorded August 4, 2015), Bill breaks away from the traditional format to provide context around the headline of Puerto Rico defaulting on some of their bonds.

Highlights include:

  • Puerto Rico’s debt is larger than every other state in the U.S. except for California and New York
  • They did not make payment on a specific type/class of bond
  • General obligations/revenue bonds are indeed still being paid, just specific class of bonds are in default (smaller of the classes)
  • Puerto Rican government has formal restructure plan to be announced early September; more bonds may be impacted
  • Believes bond holders should carry some of the burden, not just the citizens of Puerto Rico

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