Three Action Steps for a Black Monday

Crosby_2015Dr. Daniel Crosby, Founder, Nocturne Capital

By now you have no doubt heard about what is (sensationally) being referred to as “Black Monday.” Up over 60% YTD just a few short months ago, China now sits in negative territory for the year. Greece and Puerto Rico continue to weigh on investors’ minds and American markets invoked Rule 48 this morning, a seldom-used provision that allows market makers to suspend trading in an effort to smooth volatility and assuage panic.

With bad news seemingly everywhere and situated at the end of a long-in-the-tooth bull market, it’s not hard to see why investors are rattled. But at times like this, it behooves investors to take a deep breath and rely on rules instead of emotions. To assist you in this difficult time, I’ve prepared a handful of “do’s” for worried investors, with the “don’ts” to follow in my next post.

Do Know Your History – Despite what political pundits and TV commentators would have you believe, this is not an unusually scary time to be alive. Although you’d never know it from watching cable, the economy is growing (slowly) and most quality of life statistics (e.g., crime, drug use, teen pregnancy) have been headed in the right direction for years! Markets always have and always will climb a wall of worry, rewarding those who stay the course and punishing those who succumb to fear.

Warren Buffett expressed this beautifully when he said, “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.” Such it has ever been, thus will it ever be.

Do Take Responsibility – Which of the following do you think is most predictive of financial performance: A) market timing B) investment returns or C) financial behavior? Ask most men or women on the street and they are likely to tell you that timing and returns are the biggest drivers of financial performance, but the research tells another story. In fact, the research says that you – that’s right – you, are the best friend and the worst enemy of your own portfolio.

Over the last 20 years, the market has returned roughly 8.25% per annum, but the average retail investor has kept just over 4% of those gains because of poor investment behavior. What happens in world financial markets in the coming years is absolutely out of your control. But your ability to follow a plan, diversify across asset classes and maintain your composure are squarely within your power. At times when market moves can feel haphazard, it helps to remember who is really in charge.

Do Work with a Professional – Odds are that when you chose your financial advisor, you selected him or her because of his or her academic pedigree, years of experience or a sound investment philosophy. Ironically, what you likely overlooked entirely is the largest value he or she adds—managing your behavior. Studies from sources as diverse as Aon Hewitt, Vanguard and Morningstar put the value added from working with an advisor at 2 to 3% per year. Compound that effect over a lifetime, and the power of financial advice quickly becomes evident.

Vanguard suggests that the benefit of working with an advisor is “lumpy”, that is, the effects of working with an advisor are most pronounced during periods of volatility (like today). They go so far as to break out the impact of the various services provided by an advisor, and while asset management accounts for less than half of one percent, behavioral coaching accounts for fully half of the value provided by working with a professional. Today is the day your financial advisor earns their keep. Don’t be afraid to reach out to your advisor during times of fear and seek reassurance and advice. After all, they are the one’s saving you more money by holding your hand than by managing your money!

Views expressed are for illustrative purposes only. The information was created and supplied by Dr. Daniel Crosby of Nocturne Capital, an unaffiliated third party. Brinker Capital Inc., a Registered Investment Advisor

Monthly Market And Economic Outlook: August 2015

Amy Magnotta

Amy Magnotta, CFASenior Investment Manager, Brinker Capital

Developed equity markets rebounded in July amid easing of the debt crisis in Greece and improving U.S. economic data. However, concerns over a slowdown in China, renewed weakness in Brazil and a further sell‐off in commodity prices weighed on emerging market equities. Fixed income was the beneficiary of a flight to quality, with sovereign yields moving lower and the asset class delivering positive returns. The exception being high yield as credit spreads moved wider during the month. The default by Puerto Rico does not appear to have caused a broader sell‐off in the municipal bond market.

Year to date U.S. equity returns have been muted overall, but we have seen significant dispersion by style as growth has significantly outpaced value across market capitalizations. From a sector perspective, healthcare and consumer discretionary have led while energy, utilities and materials have lagged. U.S. equity markets have lagged developed international equity markets, despite continued strength in the U.S. dollar. Year to date the MSCI EAFE Index has gained more than 8%, boosted by strong gains in Japan and areas within the Eurozone. However, emerging market equities have posted broad‐based losses so far this year. The wider dispersion across and within asset classes has provided more attractive opportunities for active management.

Solid performance in July moved the fixed income asset class back into positive territory for the year to date period. All sectors with the exception of investment grade credit are in positive territory. The higher coupon has given high yield an edge year to date despite wider spreads. After a solid month, municipal bonds have pulled in line with taxable bonds year to date. With the expectation that the Fed will raise short‐term rates this year, our portfolios continue to be positioned in defense of rising interest rates, with a shorter duration and a yield advantage versus the broader market.

Our outlook remains biased in favor of the positives, but recognizing risks remain. We’ve entered the second half of the business cycle, but the global macro backdrop keeps us positive on 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, 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.
  • U.S. growth stable and inflation tame: U.S. GDP growth rebounded in the second quarter and the labor market continues to show steady improvement. The slower recovery we’ve experienced following the financial crisis may lead to a longer period of expansion than in previous cycles. While wages are showing signs of acceleration, 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. Global M&A activity is up 41% from a year ago (Source: Thomson Reuters). 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:

  • Fed tightening: 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, 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.
  • Contagion risk relating to the situations in Greece and China must continue to be monitored.
  • Geopolitical risks could cause short‐term volatility.

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. We expect this volatility and dispersion of returns to lead to more attractive opportunities for active management across and within asset classes. Concerns surrounding the risks outlined above could lead to a pull‐back in the markets; however, because of our positive macro view, we’d view a pull‐back as a buying opportunity and would expect the equity market to continue its uptrend.

Source: Brinker Capital

Brinker Capital, Inc., a Registered Investment Advisor.
Views expressed are for informational purposes only. Holdings subject to change. Not all asset classes referenced in this material may be represented in your portfolio. All investments involve risk including loss of principal. Fixed income investments are subject to interest rate and credit risk. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes, and different methods of accounting and financial reporting.

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

Investment Insights Podcast – July 24, 2015

miller_podcast_graphicBill Miller, Chief Investment Officer

On this week’s podcast (recorded July 17, 2015):

What we like: The Greeks and Europeans worked out a deal, strong start to earnings season

What we don’t like: Attention shift to Janet Yellen’s plan to raise interest rates; raise could go into early next year

What we’re doing about it: Destinations reallocation maintained risk exposure; covered shorts and adding to our long positions in Europe

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: July 2015

Amy MagnottaAmy Magnotta, CFASenior Investment Manager, Brinker Capital

Uncertainty over the start of the Federal Reserve’s rate hike campaign, the possibility of a default in Greece and Puerto Rico, and the drop in China shares each weighed on financial markets in June, resulting in a quarter of flat to negative performance across most asset classes. The increased volatility and higher level of dispersion across and within asset classes has benefited active management.

The S&P 500 Index fell almost -2% in June but was able to eke out a small gain for the quarter, despite the negative headlines. The healthcare and consumer discretionary sectors continued to lead, while bond proxies like dividend-paying stocks and REITs struggled. Energy stocks continued to lose ground as well despite a stabilization in crude oil prices. From a market cap perspective, small caps are leading large and mid caps, but the margin isn’t as wide as it is between growth and value. Through the first half of the year, all style boxes are positive except for large cap value, which is modestly negative. However, dispersion is wide, with small cap growth outpacing large cap value by more than 900 basis points over that time period.

Greece_OutlookThe rally in international equities slowed in the second quarter as fears surrounding Greece prompted a sharper sell-off in June; however, international markets still ended the quarter ahead of U.S. markets and continue to have a sizeable lead through the first half of the year. The U.S. Dollar Index (DXY) was weaker in the second quarter, but has still posted gains of more than 5% in the first half, dampening international equity returns for U.S. investors.

In developed markets, Japan, fueled by its expansive quantitative easing program, has been the top performer year to date, gaining almost 14%. Europe, despite a weaker second quarter, has gained more than 4%. Emerging markets soared in April, but gave most of the gains back in May and June to end the quarter in line with developed international markets. June’s significant decline in the Chinese local stock market, which had gained more than 110% since November, prompted a number of policy responses. However, for investors the vast majority of exposure is gained through listings on the more open Hong Kong exchange, which has not experienced gains and losses of even close to the same magnitude.

Anticipation of a Fed rate hike in the fall incited a rise in long-term U.S. Treasury yields, with yield on the 10-year note climbing 41 basis points during the quarter to 2.35%. As a result, the Barclays Aggregate declined -1.7% in the second quarter and is slightly negative through the first six months of the year. All fixed income sectors were negative for the quarter, led by U.S. Treasuries. The macro concerns caused both investment grade and high-yield credit spreads to widen, but due to its yield cushion, the high-yield index was flat for the quarter and remains the strongest fixed income sector year to date with a gain of +2.5%. Despite the recent widening, spreads are still at levels below where we started the year. Municipal bonds finished the quarter ahead of taxable bonds, but are still flat year to date. Increased supply weighed on the municipal market in the second quarter.

Our outlook remains biased in favor of the positives, but recognizes that risks remain. We’re solidly in the second half of the business cycle, but the global macro backdrop keeps us positive on 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 Fed 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.
  • U.S. growth stable and inflation tame: Despite a soft patch in the first quarter, U.S. economic growth is forecast to be positive in the second quarter and the labor market continues to show steady improvement. While wages are showing signs of acceleration, 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.
  • 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:

  • 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.
  • Contagion risk relating to the situations in Greece and China must continue to be monitored.
  • Geopolitical risks could cause short-term volatility.

Despite higher than average valuations, neutral investor sentiment and a weaker technical backdrop, we believe the macro picture supports additional market gains over the intermediate-term. However, with headline risk of events in Greece and the Fed set to normalize monetary policy, a larger pull-back is not out of the question. The S&P 500 Index has gone more than 900 days without a 10% correction, the third longest period on record (Source: Ned Davis Research). However, because of our positive macro view, we’d view a pull-back as a buying opportunity and would expect the equity market to continue its uptrend.

Fed_OutlookWe 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. With the Fed set to increase the federal funds rate this year, we should see a flattening of the yield curve. Our portfolios are positioned in defense of rising interest rates, with a shorter duration and yield cushion versus the broader market.

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. We expect this volatility and dispersion of returns to lead to more attractive opportunities for active management across and within 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. US
Fixed Income +/- Favor global high yield
Absolute Return + Favor fixed income AR, event driven
Real Assets +/- Favor global natural resources
Private Equity + Later in cycle

Source: Brinker Capital

Brinker Capital, Inc., a Registered Investment Advisor. Views expressed are for informational purposes only. Holdings subject to change. Not all asset classes referenced in this material may be represented in your portfolio. All investments involve risk including loss of principal. Fixed income investments are subject to interest rate and credit risk. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes, and different methods of accounting and financial reporting.

Investment Insights Podcast – July 10, 2015

Bill MillerBill Miller, Chief Investment Officer

On this week’s podcast (recorded July 7, 2015):

What we like: Harvard study shows when there’s debt relief as part of the solution, countries tend to recover and thrive more quickly

What we don’t like: The emotional impact the Greek crisis has on investors, chiefly contagion and anger

What we’re doing about it: Touting behavioral finance; investors shouldn’t allow this anger or fear to dictate their investment decisions; encouraging the themes found in Personal Benchmark: Integrating Behavioral Finance and Investment Management 

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.

 

International Insights Podcast – Greek Tragedy Revisited After the Referendum

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

This audio podcast was recorded July 6, 2015:

Stuart’s podcast provides an update on Greece following this weekend’s referendum vote.

Highlights of the discussion include:

  • Greece itself is a known issue; however, secondary contagion impacts are not known
  • More caution on Europe; potential fallout on other risk markets
  • Areas to watch: level of EUR, peripheral bond spreads and politics

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.

International Insights Podcast – Greece: How Bad Is It?

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

This audio podcast was recorded June 29, 2015:

Not surprisingly, Stuart’s podcast this week features the unnerving situation in Greece and the ripple effect it may have on a global scale.

Highlights of the discussion include:

In short…

  • The breakdown in negotiations between Greece and its creditors justifiably disappointed the markets.
  • Our sense is the end of the world has not come yet.
    • Primary links to Europe and world economy appear small and manageable.
    • Secondary links to Europe are murkier but not visible near term.
  • Watch economics and politics in peripheral Europe for further direction.

So, what about the near-term?

  • Do not underestimate Europe’s ability to prolong the agony (though it appears they are trying to force Greece’s hand even with the announced July 5 referendum).
  • Multiple scenarios could happen:
    • Best case is that Greece gets new government more willing to cut a deal
    • Worst case is Grexit and passive EU institutions

Does that mean it’s time to panic?

  • Primary links appear relatively minor and obvious
    • Most of Greece’s €340bn debt held by large government institutions (ECB, EU, IMF)
    • Direct trade links are small
    • Greek economy is small relative to Europe and the world
  • Secondary impacts less clear
    • Near-term hit to European confidence and economic growth
    • Medium-term credibility issue to the euro as a concept – in event of Grexit, should we worry about who is next?
      • Examples:
        • Italy – lower popular political support for euro (though ruling coalition supports Euro)
        • Spain – pending 4Q15 elections (one opposition party Podemos with minority of votes considers itself kindred to the ruling Greek Syriza party)
        • France – greater need for fiscal tightening, most popular anti-Euro populist party in LePen National Front

What to keep an eye on if things are getting worse or better

  • The euro
  • Peripheral bond spreads (Italy, Spain vs. Germany)
  • Greek referendum (Does it even happen? “Yes” a good result, but does it result in new negotiations and/or change of government?)
  • Popularity of other populist political parties in other parts of Europe (Spain, France, Italy)

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.

Investment Insights Podcast – June 19, 2015

Rosenberger_PodcastAndrew Rosenberger, CFA, Senior Investment Manager

On this week’s podcast (recorded June 16, 2015): Andy Rosenberger takes his turn on the mic to share recent economic data including industrial production, housing starts as well as some survey data on manufacturing.

Highlights from the podcast include:

  • Mixed economic data to continue; suggests positive growth.
  • Most economists not expecting any action from the Fed following the conclusion of their meeting; expectations of higher interest rates pushed towards latter part of the year.
  • Talks again broke down in Greece, impacting markets negatively; however, they are likely to pick back up.
  • As it’s been over 2.5 years since we’ve seen a 10% correction, we shouldn’t ignore that there could be more downside risk from here; however, earnings have held up and economy appears to be growing.

Listen here for the full version of Andy’s insights.

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.

Investment Insights Podcast – June 12, 2015

Bill MillerBill Miller, Chief Investment Officer

On this week’s podcast (recorded June 9, 2015):

What we like: Improving economic data; U.S. vehicle production up; payroll employment growth; jobless claims lower; good news abroad

What we don’t like: Stock market stuck in neutral; Greece hurting; rising interest rates

What we’re doing about it: Staying patient; watching Greece maintain in the EU; keeping an eye on interest rates

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.