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.

March 2016 Monthly Market And Economic Outlook

Amy MagnottaAmy Magnotta, CFASenior Investment Manager, Brinker Capital

February was a fragmented month. Equity markets were down mid- to high-single-digits for the first half of the month but rebounded off the February 11 bottom to end the month relatively flat. While fears of slower growth in U.S. and China as well as volatile oil prices continued to serve as negative catalysts to equity markets in the beginning of the month, positive reports of strong consumer spending and  employment as well as signs of stabilization in oil prices helped dissipate fears. In response, the market rallied during the second half of the month, finishing in neutral territory.

The S&P 500 Index ended slightly negative with a return of -0.1% for February. Sector performance was mixed with more defensive sectors – telecom, utilities and consumer staples – posting positive returns. Underperformance of health care and technology sectors caused growth to lag value for the month. Small caps continued to lag large caps, and micro caps had a particularly challenging month, underperforming all market caps.

International equity markets lagged U.S. markets in both local and in U.S. dollar terms for the month. Weak economic data coupled with concerns over the effectiveness of monetary policy response in both Europe and Japan caused investor confidence to drop, negatively impacting developed international markets. Emerging markets were relatively flat on the month, remaining ahead of developed international markets as these export heavy countries benefited from more stable currencies and an upturn in oil prices.

U.S. Treasury yields continued to fall in the beginning of the month, bottoming at 1.66%, before bouncing back to end the month at 1.74% as equities rebounded. The yield curve marginally flattened during the month. All investment grade sectors were positive for the month and municipal bonds also posted a small gain. High yield credit gained 0.6% as spreads contracted 113 basis points after reaching a high of 839 basis points on February 11th. We remain positive on this asset class due to the underlying fundamentals and attractive absolute yields.

We remain positive on risk assets over the intermediate-term as we believe we remain in a correction period rather than the start of a bear market. The worst equity market declines are typically associated with recessions, which are preceded by aggressive central bank tightening or accelerating inflation, factors we do not believe are present today. 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, and, while a recession 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 accommodation: Despite the Federal Reserve beginning to normalize monetary policy with a first rate hike in December, their approach should be patient and data dependent.  More signs point to the Fed delaying the next rate hike in March. 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.
  • U.S. growth stable and inflation tame: U.S. economic growth has been modest but steady. GDP estimates are running at 2.2% for the first quarter (Source: Federal Reserve Bank of Atlanta). Payroll employment growth has been solid and the unemployment rate has fallen to 4.9%. 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.
  • Washington: The new budget fiscal policy is poised to become modestly accommodative, helping offset more restrictive monetary policy.vola

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

  • 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.
  • Slower global growth: Economic growth outside the U.S. is decidedly weaker, and a significant slowdown in China is a concern.
  • Wider credit spreads: While overall credit conditions are still accommodative, high yield credit spreads remain wide, and weakness is widespread.
  • Another downturn in commodity prices: Oil prices have rebounded off of the recent lows; however, another significant leg down in prices could become destabilizing.

On the balance, the technical backdrop of the market remains on the weaker side, but valuations are at more neutral levels. We expect a higher level of volatility as markets digest the Fed’s actions and assess the impact of slower global growth; however, our view on risk assets tilts positive over the near term. Higher volatility has led to attractive pockets of opportunity that as active managers we can take advantage of.

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.

Monthly Market And Economic Outlook: October 2015

Amy MagnottaAmy Magnotta, CFASenior Investment Manager, Brinker Capital

A slowdown in China, which generated anxiety over the outlook for global growth, combined with the Federal Reserve’s decision to postpone the first interest rate hike, while warning of global developments, led to uncertainty and significant equity market volatility during the third quarter. The S&P 500 Index declined -12.4% from its May high through August 25 and ended the quarter with a -6.4% decline—the worst quarter since the third quarter of 2011. U.S. equity markets held up better than international equity markets, both developed and emerging. Longer-term Treasury yields declined during the quarter while credit spreads widened in response to the risk-off environment. Crude oil prices reached another low in late August, also weighing on global equity and credit markets.

Leadership within the U.S. equity market sector shifted in the third quarter. Utilities was the only sector to post a gain for the quarter. Healthcare gave back all of the gains it generated in the first half of the year, ending the quarter among the worst performing sectors with a decline of -10.7%. Energy and materials continued their declines, the former down more than -21% year to date. Large caps outpaced small and mid caps, but style performance was more mixed. Growth had a significant advantage within large caps; however, value led across small caps.

U.S. equity markets fared better than international developed equity markets in the third quarter, significantly narrowing the performance differential for the year-to-date period. The strength in the U.S. dollar moderated in the third quarter. Japan fell -14% in local currency terms on weaker-than-expected economic data, and the yen rebounded. The Europe ex-UK region was a relative outperformer, while commodity countries were relative underperformers. Emerging markets suffered steeper declines than developed markets. Fear of a hard landing in China and a weak economy and debt downgrade in Brazil weighed on the asset class.

High-quality fixed income held up well during the equity market volatility. The yield on the 10-year U.S. Treasury fell approximately 30 basis points to end the quarter at 2.06%. The Barclays Aggregate Index gained 1.2% for the quarter, with all sectors in positive territory. Municipal bonds also delivered a small gain. However, high-yield credit experienced significant spread-widening during the quarter, with the option-adjusted spread climbing more than 150 basis points to 630, and the index falling -4.8% in total return terms. While high-yield credit weakness is more pronounced in the energy sector, the softness has spread to the broader high-yield market.

Our outlook remains biased in favor of the positives, but recognizing that 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 cautious 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 rebounded in the second quarter and consensus expectations are for 2.5% growth moving forward. Employment growth is solid, with an average monthly gain of 229,000 jobs over the last 12 months. Wages have not yet shown signs of acceleration despite the tightening labor market, and reported inflation measures and inflation expectations remain below the Fed’s target.
  • U.S. companies remain in solid shape: M&A activity has picked up and companies also are putting cash to work through capex and hiring. Earnings growth outside of the energy sector is positive, and margins have been resilient. However, weakness due to low commodity prices could begin to spread to other sectors.

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

  • Fed tightening: After delaying in September, the Fed has set the stage to commence rate hikes in the coming months. Both the timing of the first rate increase, and 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.
  • Washington: Congress still needs to address a budget to avoid a government shutdown later this year, as well as an increase to the debt ceiling. While a deal on both is likely, brinkmanship could impact the markets short-term.
  • Geopolitical risks could cause short-term volatility.

While the recent drop in the equity market is concerning, we view 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 often preceded by substantial central bank tightening or accelerating inflation. As described above, we don’t see these conditions being met. 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 if the Fed begins tightening monetary policy later this year, the pace will be measured as inflation is still below target. However, we would not be surprised if market volatility remains elevated and we re-tested the August 25th low as history provides many examples of that occurrence. Good retests of the bottom tend to occur with less emotion and less volume as the weak buyers have already been washed out. Sentiment has moved into pessimism territory, which, as a contrarian indicator, is a positive for equity markets.

As a result of this view that we’re still in a correction period and not a bear market, we are seeking out opportunities created by the increased volatility. We expect volatility to remain elevated as investors position for an environment without Fed liquidity. However, such an environment creates greater dislocations across and within asset classes 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.

Monthly Market and Economic Outlook: June 2015

Amy MagnottaAmy Magnotta, CFASenior Investment Manager, Brinker Capital

Financial markets in May were mixed with modestly positive returns in U.S. equity markets (+1.3% for the S&P 500), modestly negative returns for international equity markets (-1.5% for the MSCI ACWI ex USA), and flat returns in U.S. fixed income markets (-0.2% for the Barclays Aggregate). U.S. economic data was on the weaker side, generally attributed to bad weather; however, the labor market continues to show improvement. The expectation is still for the Fed to commence rate hikes later this year.

In U.S. equity markets all sectors were positive for the month except for Energy and Telecom. The healthcare sector led with gains of more than 4%. Small caps led large caps for the month, and growth led value except in the mid cap segment.

International equity markets delivered a small gain in local terms, but the stronger dollar weighed on returns for U.S. investors. Japan gained more than 5% in local terms amid stronger economic data, while Europe gained less than 1% in local terms. Emerging market equities lagged developed markets in May, declining -4% in US dollar terms. China and Brazil were particularly weak performers. Despite weaker performance in May, both developed international and emerging markets lead U.S. equity markets so far this year by a sizeable margin.

The 10-year U.S. Treasury yield ended the month 10 basis points higher at a level of 2.13% and so far in June 10-year yields have backed up another 25 basis points (through June 5). However, because of the small coupon cushion in U.S. Treasuries today, only a small increase in yields can lead to a negative total return for investors. The credit sector was mixed in May, with investment grade experiencing declines and high yield delivering small gains. Municipal bonds continued to underperform taxable bonds. Year to date high yield leads all fixed income sectors.

Our outlook remains biased in favor of the positives, but recognizing risks remain. We have entered the second half of the business cycle, but 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 and inflation tame: Despite a soft patch in the first quarter, U.S. economic growth is expected to turn positive in the second quarter and the labor market has markedly improved. Reported inflation measures and inflation expectations remain below the Fed’s target.
  • U.S. companies remain in solid shape: U.S. companies are beginning to put cash to work through capex, hiring and M&A. Earnings growth outside of the energy sector is positive, 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 first rate increase, and the subsequent path of rates is uncertain, which could lead to increased market 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. Growth in emerging economies has slowed as well.
  • Geopolitical risks: Could cause short-term volatility.

Despite higher than average valuations and neutral investor sentiment, the trend is still positive and the macro backdrop leans favorable, so we believe there is the potential for additional equity market gains. The quantitative easing programs of the European Central Bank and the Bank of Japan, 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 continue to normalize; however, U.S. Treasuries still offer relative value over sovereign bonds in other developed markets, which could keep a ceiling on long-term rates in the short-term.

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 both equity and bond market volatility. This volatility should lead to more attractive opportunities 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 +/- High-yield favorable
Absolute Return + Benefit from higher volatility
Real Assets +/- Favor global natural resources
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.

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.

International Insights Podcast – Europe and Negative Interest Rates

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

This audio podcast was recorded March 19, 2015:

Stuart’s International Insights Podcast focuses on a new and growing phenomenon in European fixed income–negative interest rates

Highlights of the discussion include:

How did we get here?:

  • ECB QE drove bond values up and yields down
  • One out of every five euros of government debt trades with a negative interest rate (0 such securities existed in the summer of last year)
  • Non-ECB banks Switzerland and Sweden cutting interest rates to dissuade capital inflows in an effort to manage exchange rate
  • Asset managers and insurance companies trying to fund longer-term liabilities but they earn lower or negative spreads without price appreciation.

Potential implications:

  • Scenario 1: Little to no economic growth
    • Near-term, stimulative to European equities
    • Potentially helpful to the U.S. dollar, but less so for export earning of large U.S. companies
  • Scenario 2: Moderate to high economic growth
    • ECB potentially steps back to review QE perhaps pushing bond yields upward
    • Fixed income globally would be most at risk

Click here to listen to the 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, a Registered Investment Advisor.

Educating Clients in the Search for Yield

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

We were proud to be Premier Sponsors of this year’s Financial Services Institute’s OneVoice conference. We participated on multiple panels while there and had the opportunity to network and hear from many industry experts to learn about the latest within the industry.

I participated on the panel, Educating Clients in the Search for Yield, that addressed the issue of whether or not alternatives provide a legitimate and sustainable source of income. After a great discussion, we concluded that investors need to understand what they are buying and should consider these issues when doing their due diligence:

  • There is a variety of alternatives that come with lower (but not zero) correlation to traditional asset classes (equities and bonds) absolute return, real asset, BDC, private equity strategies have different return and risk profiles; liquid and illiquid structures.
  • It is important to be aware of the risk components within strategy: interest rate, credit, operational, funding risk.
  • Don’t stretch for promise of high yield as high yield is only one part of total return.

Click here to listen to the audio recording.

Investment Insights Podcast – February 5, 2015

Raupp_Podcast_GraphicJeff Raupp, CFA, Senior Investment Manager

On this week’s podcast (recorded January 31, 2015):

What we like: Yields on investment-grade and high-yield corporate bonds have moved higher; credit is strong fundamentally; investors indiscriminately selling credit securities

What we don’t like: Impact of lower oil prices on energy companies; possible creation of defaults

What we’re doing about it: Keeping current weight to credit, but opportunities arising due to credit selling; monitoring falling oil prices

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.

Monthly Market and Economic Outlook: March 2014

Amy MagnottaAmy Magnotta, CFA, Senior Investment Manager, Brinker Capital

The U.S. equity market suffered a mild pullback in the second half of January, but resumed its trend higher in early February. The S&P 500 Index gained 4.3% in February to close at a record-high level. The consumer discretionary (+6.2%) and healthcare (+6.2%) sectors led during the month, while telecom (-1.8%) and financials (+3.1%) lagged. From a style perspective, growth continues to lead value across all market caps.

International equity markets edged out U.S. markets in February, helped by a weaker U.S. dollar. Performance on the developed side was mixed. Japan suffered a decline for the month (-0.5%), but Europe posted solid gains (+7.3%).  Emerging markets bounced back (+3.3%) as taper fears eased somewhat; however, they remain negative for the year.

Interest rates were unchanged in February and all fixed income sectors posted small gains. The 10-year Treasury ended the month at 2.66%, 34 basis points lower than where it started the year. Credit, both investment grade and high yield, continues to perform very well as spreads grind lower. High yield gained over 2% for the month. Municipal bonds have started the year off very strong gaining more than 3% despite concerns over Puerto Rico. Flows to the asset class have turned positive again, and fundamentals continue to improve.

While we believe that the bias is for interest rates to move higher, it will likely be a choppy ride. Despite an expectation of rising rates, fixed income still plays an important role in portfolios as a hedge to equity-oriented assets, just as we saw in January. Our fixed income positioning in portfolios—which includes an emphasis on yield-advantaged, shorter duration and low volatility absolute return strategies—is designed to successfully navigate a rising or stable interest rate environment.

We approach our macro view as a balance between headwinds and tailwinds. We believe the scale remains tipped in favor of tailwinds as we move into 2014, with a number of factors supporting the economy and markets over the intermediate term.

  • Monetary policy remains accommodative: Even with the Fed tapering asset purchases, short-term interest rates should remain near zero until 2015. Federal Reserve Chair Yellen wants to see evidence of stronger growth. In addition, the European Central Bank stands ready to provide support, and the Bank of Japan has embraced an aggressive monetary easing program.
  • Global growth stable: U.S. economic growth has been slow and steady. While momentum picked up in the second half of 2013, the weather appears to have had a negative impact on growth to start 2014. 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 stable. The unemployment rate has fallen to 6.6%.
  • Inflation tame: With the CPI increasing just +1.6% over the last 12 months, inflation in the U.S. is running below the Fed’s target.
  • U.S. companies remain in solid shape: U.S. companies have solid balance sheets that could be reinvested, returned to shareholders, or used for acquisitions. Corporate profits remain at high levels, and margins have been resilient.
  • Equity fund flows turned positive: Continued inflows would provide further support to the equity markets.
  • Some movement on fiscal policy: After serving as a major uncertainty over the last few years, there has been some movement in Washington. Fiscal drag will not have a major impact on growth this year. All parties in Washington were able to agree on a two-year budget agreement, averting another government shutdown, and the debt ceiling was addressed.

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

  • Fed tapering/exit: The Fed began reducing the amount of their asset purchases in January, and should they continue with an additional $10 billion at each meeting, quantitative easing should end in the fall. Risk assets have historically reacted negatively when monetary stimulus has been withdrawn; however, the economy appears to be on more solid footing this time, and the withdrawal is more gradual. The reaction of emerging markets to Fed tapering is cause for concern and will contribute to higher market volatility.
  • Significantly higher interest rates: Rates moving significantly higher from current levels could stifle the economic recovery. Should mortgage rates move higher, it could jeopardize the recovery in the housing market.

Risk assets should continue to perform if real growth continues to recover; however, we could see volatility as markets digest the slow withdrawal of stimulus by the Federal Reserve. Valuations have certainly moved higher but are not overly rich relative to history. There are even pockets of attractive valuations, such as certain emerging markets. After the near 6% pullback in late January/early February, investor sentiment is now elevated again.

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.

Magnotta_MonthlyUpdate_3.4.14

Data points above compiled from FactSet, Standard & Poor’s, MSCI, and Barclays. The views expressed are those of Brinker Capital and are for informational purposes only. Holdings subject to change.