August 2017 market and economic outlook

Lowman_150x150pxLeigh LowmanInvestment Manager

After a strong first half to the year, positive economic growth continued into July.  Risk assets were up across the board and volatility was notably muted. Second quarter earnings came in strong with both revenue and earnings surprises accelerating from already strong levels, helped by a weaker US dollar and depressed oil prices. On the political front, the Senate’s failure to pass a healthcare bill cast a shadow on the “Trump trade”, bringing forth concerns on whether meaningful tax and regulatory reform can be accomplished. However, this failure may serve as a catalyst for other pro-growth initiatives, such as tax reform, to be pushed through in the near future.  Overall economic data leans positive and we expect markets will continue to trend upward over the near term.

The S&P 500 was up 2.1% in July and reached a record high mid-month, stemming from many large corporations reporting stronger than expected second quarter earnings. All sectors posted positive returns with the largest outperformers being telecom (+6.4%) and technology (+4.3%). Large cap stocks outperformed mid cap and small cap stocks and lead year to date.  Growth outperformed value and leads by a large margin year to date.

market outlook

Developed international equities outperformed domestic equities, returning 2.9% for the month.  Improving fundamentals and increased investor sentiment in both the Eurozone and Japan helped spur continued positive economic growth.  Both regions remain heavily reliant on central bank stimulus programs and speculation has begun on whether the European Central Bank or Bank of Japan will begin easing in the near future. Emerging markets rallied, gaining 6.0% for July, with all BRIC countries posting positive returns.  Brazil was up over 11%, stemming from initial failed corruption allegations of the country’s president, Michel Temer.

Likewise India and China posted strong returns, fueled by strong economic growth and evidence of reform.

Fixed income markets were quiet during the month.  The July Fed meeting was relatively uneventful with an expected announcement of no changes to interest rates. The Bloomberg Barclays US Aggregate Index returned 0.4% with all fixed income sectors posting positive returns. The 10 Year Treasury yield ended at 2.3%, relatively unchanged from the beginning of the month.  High yield spreads contracted an additional 12 basis points. Municipals were up 0.8%, outperforming taxable counterparts.

We remain positive on risk assets over the intermediate-term, although we acknowledge we are in the later innings of the bull market and the second half of the business cycle. While this cycle has been longer in duration compared to history, the recovery we have experienced has been muted. While our macro outlook is biased in favor of the positives and recession is not our base case, especially considering the potential of reflationary policies from the new administration, the risks must not be ignored.

We find a number of factors supportive of the economy and markets over the near term.

Reflationary fiscal policies: Despite a rocky start, we still expect fiscal policy expansion out of the Trump Administration, potentially including some combination of tax cuts, repatriation of foreign sourced profits, increased infrastructure and defense spending, and a more benign regulatory environment.

Global growth improving: U.S. economic growth remains moderate and there is evidence growth outside of the U.S., in both developed and emerging markets, is improving. Earnings growth has improved across markets as well.

Business confidence has increased: Measures like CEO Confidence and NFIB Small Business Optimism have improved since the election. This typically leads to additional project spending and hiring, which should boost growth.

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

Administration unknowns: While the upcoming administration’s policies are still being viewed favorably by investors, uncertainties remain. The market may be too optimistic that all of the pro-growth policies anticipated will come to fruition. The Administration has quickly shifted from healthcare to tax reform legislation. We are unsure how Trump’s trade policies will develop, and there is the possibility for geopolitical missteps.

Risk of policy mistake: While global growth has improved, it is important that central banks do not move to tighten too early. The Federal Reserve has begun to normalize monetary policy, but has room to be patient given muted levels of inflation. The tone of the ECB has begun to shift slightly more hawkish.

The technical backdrop of the market is favorable, credit conditions are supportive, and we have seen acceleration in economic growth. So far Trump’s policies are being seen as pro-growth, and investor confidence is elevated. The onset of new policies under the Trump administration and actions of central banks may lead to higher volatility, but our view on risk assets remains positive over the intermediate term. Higher volatility can lead to attractive pockets of opportunity we can take advantage of as active managers.

Brinker Capital Market Barometer

Barometer (002)

 

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. Indices are unmanaged and an investor cannot invest directly in an index. 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. S&P 500: An index consisting of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large-cap universe. Companies included in the Index are selected by the S&P Index Committee, a team of analysts and economists at Standard & Poor’s. Bloomberg Barclays U.S. Aggregate: A market capitalization-weighted index, maintained by Bloomberg Barclays, and is often used to represent investment grade bonds being traded in United States. Brinker Capital Inc. and Santander Investment Services are independent entities and neither is the agent of the other.

 

Investment Insights Podcast: A quick review of January markets

Leigh Lowman, Investment Manager

On this week’s podcast (recorded February 10, 2017), Leigh provides a review of January markets. Quick hits:

  • Markets were overall off to a good start in 2017 as risk assets posted modest gains for the month.
  • The S&P 500 was up 1.9% for the month.
  • International equities were also a positive as economic data in the European Union pointed to signs of a modest recovery.
  • Fixed income ended the month slightly positive.
  • Overall, we remain positive on risk assets over the intermediate term as we find a number of factors currently supportive of the economy and markets.

For Leigh’s full insights, click here to listen to the audio recording.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

Investment Insights Podcast: Markets have taken a little bit of a breather

Hart_Podcast_338x284Chris Hart, Senior Vice President

On this week’s podcast (recorded December 22, 2016), Chris is back discussing how directionally many of the trends remain in place as the rotation into equities from bonds continues.

Quick hits:

  • The markets consolidated a bit as Financials and Industrials leadership paused, while previously oversold sectors like Utilities and Healthcare, performed better.
  • International equity performance has proved more challenging.
  • A surprise came from the “dot plot” positioning that was more hawkish than anticipated due to a projected three additional rate hikes in 2017 instead of two.
  • Overall, we remain constructive on the opportunity ahead heading into 2017.

For the rest of Chris’s insight, click here to listen to the audio recording.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

Brexit: June Update

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

  • The UK referendum on Brexit to be held June 23 is coming down to the wire.
  • While polls are noisy and possibly unreliable like last year, a “Yes” for Brexit would stoke volatility for UK and other markets, particularly in Europe.
  • Brinker portfolios have been underweight developed international markets.

Following the March 3, 2016 blog on Brexit, markets have begun to reconsider the odds and implications of a potential departure of the UK from the European Union.

While the base case still appears slightly in favor of the UK remaining in the EU, the event of a “Yes” vote on Brexit could have moderate to sizable negative repercussions on markets. The UK stands to lose the most if it were to depart the EU. However, Europe could also enter another period of volatility as resurfacing doubts about European political cohesion could cloud already tepid economic recovery.

As previously mentioned, three major repercussions for the UK could consist of:

  1. A hit to direct trade with the rest of Europe
  2. Another Scottish independence referendum
  3. Job losses among UK multinationals based in the UK

Three potential repercussions for the EU could include:

  1. Another hit to GDP growth from trade disruption with the UK
  2. Magnified perception of European political risk in countries such as France and possibly Spain’s looming repeat of general elections a few days after the Brexit referendum
  3. Distraction for Europe to working through economic and foreign policy issues

Additionally, Spanish elections (for the second time in 6 months after failure to form a coalition government) will occur a few days after the Brexit referendum. The rise of non-traditional parties could once again keep or enhance chaos in Spanish politics.

A “Yes” vote is likely to keep the Fed on hold from raising interest rates given the uncertain fallout to financial markets and US exports. Even a vote to remain could keep the Fed on hold temporarily.

Brinker Capital portfolios in general have been underweight developed international equities. After having been neutral last year, portfolios reduced exposure in March due to concerns on the limits of loose monetary policy alone to bolster growth without meaningful structural reform. While it is quite possible that Brexit risks fade, this added an additional factor of volatility that motivated the reduction of international developed equities portfolios.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.