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.

Decoding the G7 Statement

Andy RosenbergerAndy Rosenberger, CFA, Senior Investment Manager

Earlier this week, members of the seven richest countries met for the official G7 conference. Center to the assembly were discussions surrounding the recent actions by Japan to stimulate their economy through currency devaluation and higher inflation targets. Investors, hungry for a green light by the G7 that Japanese policies are warranted, were disappointed and confused as conflicting statements were issued. The official statement read:

“We, the G7 Ministers and Governors, reaffirm our longstanding commitment to market determined exchange rates and to consult closely in regard to actions in foreign exchange markets. We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates. We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will continue to consult closely on exchange markets and cooperate as appropriate.”

Confused by the statement? You weren’t alone. The statement, although obscure, was initially seen by the market as a green light. Specifically, market participants focused on the following sentence:

“We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments…”

However, only hours later, an unnamed “official” was quoted in a Reuters article as saying:

“The G7 statement signaled concern about excess moves in the yen.” and “The G7 is concerned about unilateral guidance on the yen. Japan will be in the spotlight at the G20 in Moscow this weekend.”

G7

The unnamed “official” was enough to stop the yen’s depreciation; at least temporarily. Investors’ eyes will now turn to the G20 meeting this weekend for further clarification. However, the reality of all of this is that it’s more noise than news.

Japan has started down a path with which there’s no turning back. Too many failed stimulus attempts have been one of the major reasons as to why Japan hasn’t been able to escape its two-decade long deflationary spiral. Reversing course now would be disastrous for the Japanese economy, and more importantly, Japan’s newly elected Prime Minster Shinzo Abe. Prime Minster Abe has only months to establish his Liberal Democratic Party’s (LDP) credibility before another round of elections determine the party’s fate. Turning back now would surely cost the party its ruling power. Ultimately, it seems hard to believe that newly elected officials would side with six members from other countries over that of the voters and ultimately their political careers.