Investment Insights Podcast – The Rate Hike Has Finally Come

miller_podcast_graphicBill Miller, Chief Investment Officer

On this week’s podcast (recorded December 17, 2015), Bill recaps the Fed’s official decision to raise interest rates:

What we like: It’s finally over! After months and months of conversation and debate, investors can breathe a sigh of relief and now move forward; Yellen was reassuring in describing the stability of the economy and it’s resilience to the increased interest rates

What we don’t like: Notable industry thinkers are questioning the decision and timing of the rate hike; they question the overall resiliency Yellen seems so confident in

What we’re doing about it: Paying close attention to economic data released over the next quarter; interpreting how well the economy is growing and how much financial stress may be present; if commodities and manufacturing remain weak, than perhaps the Fed raised rates too soon

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.

Monthly Market And Economic Outlook: November 2015

Amy MagnottaAmy Magnotta, CFASenior Investment Manager, Brinker Capital

The market correction in the third quarter, prompted by the Federal Reserve’s decision to stay on hold and worries over China, resulted in investor sentiment reaching levels of extreme pessimism. Risk appetites returned in October and global equity markets rebounded sharply. The start to earnings season was also better than expected. With a gain of +8.4%, the S&P 500 Index posted its third-highest monthly return since 2010, bringing the index back into positive territory for the year. Fixed income markets were relatively flat, but high yield and emerging market debt experienced a rebound in the risk-on environment. Year to date through October, the S&P 500 Index leads both international equity and fixed income markets, a headwind for diversified portfolios.

Within the U.S. equity market sector leadership shifted again but all sectors were in positive territory. The energy and materials sectors, which have weighed significantly on index returns this year, both experienced double-digit gains for the month as crude oil prices stabilized. The more defensive consumer staples and utilities sectors underperformed. Large caps outpaced small and mid-caps, and the margin of outperformance for growth over value continued to widen.

International developed equity markets kept pace with U.S. equity markets in October despite a slight strengthening in the U.S. dollar. Performance in Japan and Europe was boosted on expectations of additional monetary easing. Emerging markets were only slightly behind developed markets, helped by supportive monetary and fiscal policies in China and stabilizing commodity prices. All regions were positive but performance was mixed, with Indonesia gaining more than +15% while India gained less than +2%.

U.S. Treasury yields moved slightly higher during October, and they have continued their move upward as we have entered November. Investment-grade fixed income was flat for the quarter and has provided modest gains so far this year. Municipal bonds outperformed taxable bonds. After peaking at a level of 650 basis points in the beginning of the month, the increase in risk appetite helped high yield spreads tighten more than 100 basis points and the asset class gained more than 2%. Spreads still remain wide relative to fundamentals.

Our outlook remains biased in favor of the positives, but recognizing risks remain. The global macro backdrop keeps us positive on risk assets over the intermediate-term, even as we move through the second half of the business cycle. A number of factors should support the economy and markets over the intermediate term.

  • Global monetary policy accommodation: Despite the Federal Reserve heading toward monetary policy normalization, their approach will be patient and data dependent. The ECB and the Bank of Japan have both executed bold easing measures in an attempt to support their economies. Emerging economies have room to ease.
  • U.S. growth stable and inflation tame: U.S. GDP growth, while muted, remains positive. Employment growth is solid as the unemployment rate fell to 5%. Wage growth has been tepid at best despite the tightening labor market, and reported inflation measures and inflation expectations remain below the Fed’s target.
  • U.S. companies remain in decent shape: M&A deal activity continues to pick up as companies seek growth. Earnings growth outside of the energy sector is positive, but margins, while resilient, have likely peaked for the cycle.
  • Washington: Policy uncertainty is low and all parties in Washington were able to agree on a budget deal and also raised the debt ceiling to reduce near-term uncertainty. With the new budget fiscal policy is poised to become modestly accommodative, helping offset more restrictive monetary policy.

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

  • Fed tightening: After delaying in September, expectations are for the Fed to raise the fed funds rate December. The subsequent path of rates is uncertain and may not be in line with market expectations, which could lead to increased volatility.
  • Slower global growth: Economic growth outside the U.S. is decidedly weaker. It remains to be seen whether central bank policies can spur sustainable growth in Europe and Japan. A significant slowdown in China is a concern, along with slower growth in other emerging economics like Brazil.
  • Geopolitical risks could cause short-term volatility.

While the equity market drop was concerning, we viewed the move as more of a correction than the start of a bear market. The worst equity market declines are associated with recessions, which are preceded by substantial central bank tightening or accelerating inflation. As described above, we don’t see these conditions being met yet today. The trend of the macro data in the U.S. is still positive, and a significant slowdown in China, which will certainly weigh on global growth, is not likely enough to tip the U.S. economy into contraction. Even as the Fed begins tightening monetary policy later this year, the pace will be measured as inflation is still below target. While we expect a higher level of volatility as the market digests the Fed’s actions and we move through the second half of the business cycle, we remain positive on risk assets over the intermediate term. Increased volatility creates opportunities that 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.

Monthly Market and Economic Outlook: April 2015

Amy MagnottaAmy Magnotta, CFASenior Investment Manager, Brinker Capital

After 2014 was dominated by the strong performance of the narrow S&P 500 Index, the first quarter of 2015 showed better results for diversified portfolios and higher levels of volatility across and within asset classes—both positive developments for active management.

The focus remained on the Federal Reserve and the timing of the initial interest rate hike despite U.S. economic data coming in below expectations. The S&P 500 gained just 1% for the quarter, while mid caps and small caps fared better, gaining 4%. Growth outperformed value across all market caps, and high-dividend-paying stocks lagged amid concern of higher interest rates. The strong dollar also hurt U.S. multinationals as a high percentage of their profits are derived from overseas. Despite a strong February, commodity prices fell again in March and were the worst performing asset class for the quarter.

shutterstock_28211977While the anticipation of tighter monetary policy may have weighed on U.S. equity markets in the first quarter, looser monetary policy helped to boost asset prices in international developed markets. The MSCI EAFE Index surged 11% in local terms, but the stronger dollar dampened returns in U.S. dollar terms to 5%, still 400 basis points ahead of the S&P 500 Index. The euro fell -11% versus the dollar, the largest quarterly decline since its inception in 1999. Japan also benefited from central bank policy, gaining 10%.

Emerging market equities outpaced U.S. equities for the quarter, gaining 2.3%; however, dispersion was quite wide. All emerging regions delivered positive returns in local currency terms, although weaker currencies in Latin America had a significant impact for U.S. investors. For example, Brazil’s equity market gained 3% in local terms, but fell -15% in U.S. dollar terms. China and India posted solid gains of 5-6% for the quarter.

The 10-year U.S. Treasury yield bounced around in the first quarter, first declining 49 basis points in January, then climbing 56 basis points in February before declining again to end the first quarter at a level of 1.94%, 23 basis points lower than where it started. The Barclays Aggregate Index outperformed the S&P 500 Index for the quarter, with all sectors in positive territory. Credit spreads tightened modestly during the quarter and the high-yield sector outperformed investment grade. Municipal bonds were slightly behind taxable bonds as the market had to digest additional supply.

Our outlook remains biased in favor of the positives but recognizes that risks remain. We feel we have entered the second half of the business cycle and remain optimistic regarding the global macro backdrop and risk assets over the intermediate term. As a result, our strategic portfolios are positioned with a modest overweight to overall risk.

A number of factors should support the economy and markets over the intermediate term:

  • Global monetary policy accommodation: Despite the Federal Reserve heading toward monetary policy normalization, the ECB and the Bank of Japan have both executed bold easing measures in an attempt to support their economies.
  • U.S. growth stable: U.S. economic growth remains solidly in positive territory and the labor market has markedly improved.
  • Inflation tame: Reported inflation measures and inflation expectations in the U.S. remain below the Fed’s 2% target.
  • U.S. companies remain in solid shape: U.S. companies have solid balance sheets are beginning to put cash to work through capex, hiring and M&A. Earnings growth outside of the energy sector is decent, and margins have been resilient.
  • Less uncertainty in Washington: After serving as a major uncertainty over the last few years, Washington has done little damage so far this year; however, Congress will still need to address the debt ceiling before the fall. Government spending has shifted to a contributor to GDP growth in 2015 after years of fiscal drag.

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

  • Timing/impact of Fed tightening: The Fed has set the stage to commence rate hikes later this year. Both the timing of the initial rate increase and the subsequent path of rates is uncertain, which could lead to increased market volatility.
  • Slower global growth: While growth in the U.S. is solid, growth outside the U.S. is decidedly weaker. It remains to be seen whether central bank policies can spur sustainable growth in Europe and Japan. Growth in emerging economies has slowed as well.
  • Geopolitical risks: Issues in the Middle East, Greece and Russia could cause short-term volatility.
  • Significantly lower oil prices destabilizes global economy: While lower oil prices benefit consumers, should oil prices re-test their recent lows and remain there for a significant period, it would be a negative not only for the earnings of energy companies but also for oil dependent emerging economies and the shale revolution in the U.S.

While valuations have moved above long-term averages and investor sentiment is neutral, the trend is still positive and the macro backdrop leans favorable, so we remain positive on equities. The ECB’s actions, combined with signs of economic improvement, have us more positive in the short term regarding international developed equities, but we need to see follow-through with structural reforms. We expect U.S. interest rates to normalize, but remain range-bound, and the yield curve to flatten. Fed policy will drive short-term rates higher, but long-term yields should be held down by demand for long duration safe assets and relative value versus other developed sovereign bonds.

As we operate without the liquidity provided by the Fed and move through the second half of the business cycle, we expect higher levels of market volatility. This volatility should lead to more opportunity for active management across asset classes. 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.

Asset Class Outlook Comments
U.S. Equity + Quality bias
Intl Equity + Neutral vs. U.S.
Fixed Income +/- HY favorable after ST dislocation
Absolute Return + Benefit from higher volatility
Real Assets +/- Oil stabilizes; interest rate sensitivity
Private Equity + Later in cycle

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. Past performance is not a guarantee of similar future results. An investor cannot invest directly in an index.

Update on Impact of Russia/Ukraine Conflict on Financial Markets

QuintStuart P. Quint, CFA, Senior Investment Manager and International Strategist

A past blog in March had commented on several scenarios of how the unrest in Ukraine could play out and the potential implications of those scenarios on financial assets.  Given the crash of the Malaysian airliner over Ukraine, an update seems appropriate.

We remain of the view that the conflict in Ukraine should have a limited impact but likely a longer timeframe to play out, potentially with risks to the downside.  Downside risks would materialize in the event of an overt Russian invasion or further separatist activity in other parts of Ukraine.

We mentioned 3 areas of potential impact: (1) fixed income, (2) commodity prices (particularly energy), and (3) emerging markets.  European equities could also be affected if tensions were to spiral and/or more serious economic sanctions were taken.

Fixed income (as measured by the Barclay’s Aggregate Total Return Index) has rallied nearly 2% since that time.  One factor in the continued rally might stem from risk aversion driven by geopolitical tensions.  However, fixed income has lagged the rally in riskier asset classes such as domestic and international equities.

Energy has staged a modest gain from March to July in spite of ongoing tensions between Russia and Ukraine.  This modest impact comes in spite of not only Russian tension, but also ethnic tensions in Israel and Iraq, also a major oil producer.  Energy markets have been complacent about rising supply sources from elsewhere, including the United States, along with muted demand from many emerging markets and Europe.  Any increase in political tensions along with improved economic growth in the US and more energy-intensive emerging markets could presage an increase in energy prices.

Gold, another traditional safe harbor asset, has actually declined over -2% over this time period.

Emerging market equities have rallied strongly (over +12% during this time period), though Russian equities lagged this gain.  Select continental European equity markets such as Germany and France have been flat and lagged performance of other equity markets, suggesting a slight negative impact from uncertainty in Ukraine.

Barring a major spiraling in tensions, we would expect economic and market fundamentals to be the overwhelming drivers of asset performance rather than geopolitical tensions out of Ukraine.

Investment Insights Podcast – Unrest in Ukraine and Investment Implications

Stuart Quint, Investment Insights PodcastStuart P. Quint, CFA, Senior Investment Manager and International Strategist

Stuart joins us this week to share some comments on the developing situation in Ukraine and its impact on investors.  Click the play button below to listen in to his podcast, or read a summarized version of his thoughts below.

Podcast recorded March 3, 2014:

Ukraine’s struggles are overwhelming. Political, economic, and now military challenges confront the country. Politically and militarily speaking, the U.S. and the European Union (EU) have few tools at this time and modest willpower to oppose Russian intentions in Ukraine. And given that the ruling government is merely a caretaker for the May elections, it seems unlikely there will be a bailout package offered by the International Money Fund (IMF) any time soon. Default on existing international and local obligations appears likely in the near term.

Russia is not without its own constraints, though, as the Russian economy is directly tied to Europe. Three out of every four dollars of foreign direct investment in Russia come from Europe.[1]  The EU also remains Russia’s most important trading partner with 55% of Russian exports destined for Europe.[2]

Let’s take a look at the potential scenarios: (1) Russian annexation of the Crimea, (2) negotiated settlement with later elections that would most likely bring about a grand coalition government, probably with leanings toward Moscow, and (3) military escalation (civil war, Russian forces occupy eastern Ukraine, either of which results in a smaller Ukraine or outright disintegration as a sovereign state).

So what investment implications might this have? (1) The near term is helpful for fixed income, with commodities benefiting from any disruption of supply (oil, gas) and flight to safety (gold), and (2) negative impact most of all for European (Russia supplies 30% of European gas supply[3]) and emerging markets (mainly Russia, but also other markets with the need to import capital could suffer from currency weakness and higher interest rates demanded by investors).

A negotiated settlement involving recognition of Russian claims in exchange for a roadmap to stabilize the rest of Ukraine would reverse many of these trends.  Indeed, a similar situation occurred when Russia invaded Georgia in August 2008, but the crisis in Ukraine has potentially more serious implications given its proximity to Western Europe and that it carries a large population of over 45 million people.[4]

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

Demographic Changes Looming (Part Two)

10.17.13_BlogRyan Dressel, Investment Analyst, Brinker Capital

Part two of a two-part blog series. Head here to read part one.

Urbanization
Another noticeable change has been the amount of people living in urban versus rural areas.  The world is undergoing the largest wave of urban growth in history.  For the first time in history, more than half of the world’s population lives in towns or cities.[1]  In 1970, 73.6% of the population lived in urban areas in the U.S., compared to 79% in 2012.  In China, the shift has been even greater; 51% of people live in urban areas today, compared to just 20.6% in 1982.  Other major nations have experienced similar degrees of urbanization (percentage of population living in urban areas below)[2]

10.17.13_Demographics_Part2

Cities provide numerous economic benefits and challenges; some of which include: entrepreneurialism, education opportunities, traffic congestion, pollution, and poverty to name a few.  Perhaps the biggest challenge as a result of this trend will be a spike in food, water and commodity prices, which are already high.[3][4]  Some Governments, scientists and environmentalists are already working on solutions to these problems (such as China’s plan for a massive new desalination plant[5]), but in many areas resources are limited and solutions are inefficient on a large scale.

Wealth Inequality
Finally, the trend of wealth inequality in the United States is approaching an all-time high.  For perspective, in 1928 the top 1% of the population earned nearly 20% of all income.  The wealth gap was at its lowest in the 1960s and 1970s, but has been steadily widening since then.

Demographics_Part2

This trend has been made public in the U.S. as demonstrated by the Occupy Wall Street movement in 2012.  Regardless of your opinion surrounding the subject, wealth inequality has created noticeable economic challenges.

Some of the nationwide problems associated with wealth inequality include deteriorating health,[6] the potential for corruption (in many different facets), and a relatively weaker middle class which has historically fueled the most economic growth in the U.S.

The income gap has been blamed on everything from computers, to immigration, to global competition, but simply stated there is no clear consensus regarding the cause.[7]  This needs to be kept in mind by investors, economists and especially politicians before we spend public dollars on initiatives that aren’t effective at reducing the problems previously mentioned.

These changing demographic trends will no doubt provide challenges, but can also present exciting opportunities for generations to come if they are properly prepared for.


[1] The United nations Population Fund.  http://www.unfpa.org/pds/urbanization.htm  May, 2007.

[2] Population Reference Bureau, 2012 World Population Data Sheet, 2012.

[4] New York Times Online.  http://www.nytimes.com/2006/08/22/world/22water.html?_r=0  Celia Dugger. August 22, 2006.

[5] China Daily.  http://usa.chinadaily.com.cn/china/2011-04/09/content_12298084.htm  Cheng Yingqi.  September 4, 2011.

[6] American Medical Association.  http://www.who.int/social_determinants/publications/health_in_an_unequal_world_marmott_lancet.pdf Michael Marmot.  December 9, 2006.

[7] The Great Divergence.  Timothy Noah,  2012