Investment Insights Podcast – Markets Elect to Follow History

miller_podcast_graphicBill Miller, Chief Investment Officer

On this week’s podcast (recorded March 24, 2016), Bill weighs in on the presidential election race and its impact, or lack there of, on the markets:

Quick takes:

  • The Wall Street Journal survey indicates about 76% of respondents feel this election is introducing more uncertainty into the markets.
  • Evercore ISI research frames the election less as Democrats vs. Republicans and more as unconventional vs. mainstream.
  • While there is heightened uncertainty strewn across media headlines, the market reaction has been typical of past open presidential election races.

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 – Jolting The Economy

miller_podcast_graphicBill Miller, Chief Investment Officer

On this week’s podcast (recorded March 10, 2016), Bill highlights the latest news out of Europe and China:

What we like: Mario Draghi and the ECB announced a number of pro-stimulus policies; banks supportive in lending to businesses; more quantitative easing supports sovereign debt markets; Draghi trying to be the backstop to support the economy; China’s Five-Year Plan focused on stimulating economy

What we don’t like: Market is realizing that pure monetary stimulus is not enough; there is a global oversupply and printing more money or having markets lend more money isn’t enough to offset; investors are hearing the rhetoric but looking for results

What we’re doing about it: Keeping the same mindset that there will not be a recession; looking for opportunities within high-yield and energy

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.

Five Answers for the Voices in Your Head

Crosby_2015Dr. Daniel Crosby, Executive Director, The Center for Outcomes

Many investors are waking up this morning to the unsettling realization that trading was halted in China last night after another precipitous market drop. When paired with rumors of hydrogen bomb testing in North Korea, the recent acts of domestic terrorism and a long-in-the-tooth bull market, it can all be a little frightening and overwhelming.

It’s at a time like this that it’s best to temper the catastrophic voices in our head with some research-based truths about how financial markets work.

For each of the rash, fear-induced common thoughts below (in bold), we have countered with a dose of realism:

“It’s been a good run, but it’s time to get out.”
From 1926 to 1997, the worst market outcome at any one year was pretty scary, -43.3%; but consider how time changes the equation—the worst return of any 25-year period was 5.9% annualized. Take it from the Rolling Stones: “Time is on my side, yes it is.”

“I can’t just stand here!”
In his book, What Investors Really Want, behavioral economist Meir Statman cites research from Sweden showing that the heaviest traders lose 4% of their account value each year. Across 19 major stock exchanges, investors who made frequent changes trailed buy-and-hold investors by 1.5% a year. Your New Year’s resolution may be to be more active in 2016, but that shouldn’t apply to the market.

“If I time this just right…”
As Ben Carlson relates in A Wealth of Common Sense, “A study performed by the Federal Reserve…looked at mutual fund inflows and outflows over nearly 30 years from 1984 to 2012. Predictably, they found that most investors poured money into the markets after large gains and pulled money out after sustaining losses—a buy high, sell low debacle of a strategy.” Everyone knows to buy low and sell high, but very few put it into practice. Will you?

“I don’t want to bother my advisor.”
Vanguard’s Advisor’s Alpha study did an excellent job of quantifying the value added (in basis points) of many of the common activities performed by an advisor, and the results may surprise you. They found that the greatest value provided by an advisor was behavioral coaching, which added 150 bps per year, far greater than any other activity. At times like this is why investors have advisors so don’t be afraid to call them for advice and support.

“THIS IS THE END OF THE WORLD!”
Since 1928, the U.S. economy has been in recession about 20% of the time and has still managed to compound wealth at a dramatic clip. What’s more, we have never gone more than ten years at any time without at least one recession. Now, we are not currently in a recession, but you could expect between 10 and 15 in your lifetime. The sooner you can reconcile yourself to the inevitability of volatility, the faster you will be able to take advantage of all the good that markets do.

Brinker Capital understands that investing for the long-term can be daunting, especially during a time like this, but we are focused on providing investment solutions, like the Personal Benchmark program, that help investors manage the emotions of investing to achieve their unique financial goals.

For more of what not to do during times of market volatility, click here.

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.

The “Don’ts” for Periods of Market Volatility

Crosby_2015Dr. Daniel Crosby, Founder, Nocturne Capital

Having checked in this week with many of our advisors and the clients they serve, we know that this has been a stressful week for everyone involved in the market. On Monday, we wanted to provide a few proactive starting points and created a list of “do’s” for volatile markets. However, at times like this, knowing what not to do can be just as important as knowing what to do. With that, we present a list of things you should absolutely not be doing in periods of market volatility.

  • Don’t lose your sense of history – The average intrayear drawdown over the past 35 years has been just over 14%. The market ended the year higher on 27 of those 35 years. A relatively placid six years has lulled investors into a false reality, but nothing that we have experienced this year is out of the average by historical measures.
  • Don’t equate risk with volatility – Repeat after me, “volatility does not equal risk.” Risk is the likelihood that you will not have the money you need at the time you need it to live the life you want to live. Nothing more, nothing less. Paper losses are not “risk” and neither are the gyrations of a volatile market.
  • Don’t focus on the minute to minute – Despite the enormous wealth creating power of the market, looking at it too closely can be terrifying. A daily look at portfolio values means you see a loss 46.7% of the time, whereas a yearly look shows a loss a mere 27.6% of the time. Limited looking leads to increased feelings of security and improved decision-making.
  • Don’t forget how markets work – Do you know why stocks outperform other asset classes by about 5% on a volatility-adjusted basis? Because they can be scary at times, that’s why! Long term investors have been handsomely rewarded by equity markets, but those rewards come at the price of bravery during periods short-term uncertainty.
  • Don’t give in to action bias – At most times and in most situations, increased effort leads to improved outcomes. Want to lose weight? Start running! Want to learn a new skill set? Go back to school. Investing is that rare world where doing less actually gets you more. James O’Shaughnessy of “What Works on Wall Street” fame relates an illustrative story of a study done at Fidelity. When they surveyed their accounts to see which had done best, they uncovered something counterintuitive. The best-performing accounts were those that had been forgotten entirely. In the immortal words of Jack Bogle, “don’t do something, just stand there!”

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

Sentiment

Jeff RauppJeff Raupp, CFA, Senior Investment Manager

In February 1637, tulip bulbs sold in Holland for as much as 4,000 guilders each, over 10x the amount a skilled craftsman would earn in a year.  Months later, many tulip traders found themselves holding bulbs worth just a fraction of what they had paid for.

As crazy as prices got, tulip mania actually started with good fundamentals. Tulips were a relatively new introduction to Europe, and the flower’s intense color made it a heavily-desired feature of upper-class gardens. Most desirable were the exotic-looking, multi-colored tulips, which was caused by a mosaic virus not identified until the 1970s and now called the “tulip-breaking virus.” At best, tulip bulbs weren’t easy to produce and those with the virus suffered even lower reproduction rates. In the beginning, what occurred in the tulip market was classic supply and demand—a highly sought-after item with limited supply increasing in price. In 1634, that started to change as 11.1.13_Raupp_Sentimentspeculators were attracted to the rising prices, and in late 1636 prices started to accelerate rapidly, to where even single-color tulips were attracting prices of over 100 guilders apiece. The Dutch created a futures market for tulips that enabled traders to purchase and trade contracts to buy bulbs at the end of the season. At the peak, tulips could be traded several times a day without any physical tulips actually being exchanged or either party ever having any intention of planting the bulbs.

Then in February 1637, buyers vanished. Some suspect an outbreak of the bubonic plague as the cause, some a change in demand caused by war in Europe. Any way you look at it, the sentiment for the future price of tulip bulbs took a big U-turn, leaving many investors ruined.[1]

11.1.13_Raupp_Sentiment_1History is full of similar episodes, where investor sentiment got to extreme levels and prices diverged meaningfully from the underlying fundamental value of something, be it stocks, real estate, currency, or even tulip bulbs. Most recently the dot-com bubble in the early 2000s and the housing bubble in 2008 proved that speculation is alive and well.

While periods of extreme sentiment are easy to identify in retrospect, they’re anything but obvious while you’re in them. And while extreme levels of sentiment usually result in big price reversals, more modest levels can mark periods when the market is overbought or oversold, often followed by a market pull-back or rally. Recently, Robert Shiller of Yale University won the Nobel Prize in Economics for his work on irrational markets.

11.1.13_Raupp_Sentiment_2So how can you gauge sentiment? Some of the more popular ones are the Consumer Confidence Index and the Michigan Consumer Sentiment Index, which both try to gauge consumer’s attitudes on a variety of things, including future spending, the business climate, and their level of optimism or pessimism. More direct, and generally more volatile, are the AAII Investor Sentiment Survey and the Wells Fargo/Gallup Investor and Retirement Optimism Index, which ask investors directly about their thoughts on investments. It doesn’t end there. Investors watch Closed-End Fund discounts, Put/Call ratios, even tracking the occurrence of certain words or phrases in the media. In addition, many firms create their own blend of surveys and indexes to best gauge the overall sentiment level.

Sentiment certainly isn’t the be-all, end-all for trading your portfolio. There’s a saying that is attributed to John Maynard Keynes, “The market can remain irrational longer than you can remain solvent.” When sentiment starts moving in one direction, it’s hard to say when the reversal will occur and what will cause it. But knowing where sentiment levels are at any given time can help you get a better understanding of what markets have been doing and what to expect going forward.


[1] Mackay, Charles (1841), Extraordinary Popular Delusions and the Madness of Crowds, London: Richard Bentley, archived from the original on March 31, 2008.

The Law of Unintended Consequences

Andy RosenbergerAndrew Rosenberger, CFA, Brinker Capital

History is littered with examples of “unintended consequences” – a term referring to the fact that decision makers (and more importantly, policymakers) tend to make decisions that later have unforeseen outcomes.  I was reminded of such a fact this weekend as my wife and I launched into our annual (and seemingly unending) springtime yard cleanup.   In addition to the mulching, planting, trimming, and other routine undertakings associated with yard maintenance, every year, we spend more time and money than I care to admit trying to rid our yard of the dreaded English Ivy.  As any other homeowner with a similar problem can sympathize with, there is no amount of weed killer, weed-whacking or online product remedies that seem to tackle the problem.  Our English Ivy problem is the unintended consequence of the prior homeowners’ decision to turn their yard into an “English Garden”.

On a much grander scale, unintended consequences pop up everywhere.  Most go unnoticed by the broader public.  As one such example, The Wall Street Journal recently ran an article titled “U.S. Ethanol Mandate Puts Squeeze on Oil Refiners”.  The article highlighted that consumers could see higher prices at the pump due to government enacted mandates that force refiners to purchase market-based ethanol credits.  The original idea was that increasing the amount of ethanol used in gasoline would make gasoline cleaner burning and be better for the environment.  However, since the policy was enacted, two unforeseen issues have unfolded.  First, prices for these ethanol-based credits have skyrocketed in the past few months.  The higher ethanol credit prices mean that refiners will be forced to pass along higher prices for gasoline to the end consumer.  Second, automakers are suggesting that cars and trucks aren’t well equipped to burn the new gasoline blend.  As a result, we have a policy that was intended to produce cleaner burning gasoline which ultimately turned into higher gas prices for a product which most cars aren’t able to use.

consequencesThe reality is that the vast majority of consumers will never be informed of policy misstep.  Only industry experts and select individuals with knowledge of the matter will truly understand the costs involved.  Sometimes; however, unintended consequences have a much more visible impact on the broader economy.  That’s been the case over the past two weeks as policymakers have tried to tackle the banking problems in Cyprus.  If we rewind to last year, Greece was the conversation of topic.  Ultimately, policymakers decided that private sector bond holders should bear the brunt of the losses on Greek debt.  Fast forward to today and we have insolvent Cyprus banks.  Why?  Because Cyprus banks, which were one of the largest holders of Greek debt, were forced to write-down their assets.  So while at the time the policy of having private sector investors take the loss on Greek debt seemed like a good idea, ultimately the unintended consequence was that it would later result in Cyprus banks becoming woefully undercapitalized.

The European Union’s response to the Cyprus banking issue was subsequently just as perplexing.  As initially proposed, depositors, regardless of their size, would be taxed to cover the insolvency of the local banks.  Ultimately, while the policy was later reversed to preserve deposits below €100,000, the sanctity of small deposits suddenly disappeared.  Most market pundits will agree that Cyprus is too small and irrelevant in the grand scheme of things to bring down the European economy.  I worry, however, that the unintended consequence of Europe’s policy response will make depositors in other peripheral countries a bit more anxious when it comes to where they store their money for safekeeping.  After all, one of the tenants within economics is that if two investments have equal return, investors will choose the one with lesser risk.  With interest rates near 0% across the developed world, wouldn’t it make the most sense for depositors to store their wealth in a place with little chance of future default?  While we often like to believe that these matters are completely thought through and weighed carefully by policymakers, unfortunately, this most recent policy decision appears to driven more for domestic political purposes as opposed to European “Union” driven.

Economic Headwinds and Tailwinds

We continue to approach our macro view as a balance between cyclical tailwinds and more structural headwinds. While we have seen some improvement in the economy and strong global equity markets, helped by easy monetary policy, we continue to face global macro risks and uncertainties. The unresolved risks could result in bouts of market volatility. As a result, portfolios have a modest defensive bias, and are focused on high conviction opportunities within asset classes.

To read more, click here

turbines

Concerns Over “Fiscal Cliff” Continue to Dominate Markets

Joe Preisser

The sharp selloff in global equity markets that, through Thursday, had sent the Standard & Poor’s 500 Index down almost 6% since the reelection of President Obama, brings into stark relief the depth of the concerns among market participants over the looming “fiscal cliff” in the United States and the potential impact on the global economy if it is not averted.  With the compilation of automatic spending cuts and tax increases totaling more than $600 billion which comprise the so called, “cliff”, scheduled to take effect in January, unless an accord can be reached to forestall it, investors have quickly begun to pare back their exposure to risk based assets.  As Amy Magnotta pointed out in her most recent blog post, the effects of a failure of policy makers in Washington to reach an agreement would be severe, resulting in a  4 percent drop in Gross Domestic Product and casting the world’s largest economy back into recession.  Marko Kolanovic, the Global Head of derivatives and quantitative strategy at JPMorgan Chase & Co. was quoted by Bloomberg News, “about 90 percent of the drop in the S&P 500 since election day can be attributed to concerns about the U.S. fiscal cliff.”

The divided government, which remains in the United States following the Nov 6th elections, with a Democratically controlled White House and strengthened position in the Senate, and a continued Republican hold on the House of Representatives, has led to a continuation of the stalemate that has gripped the Capital for much of the past two years.   Although the representation of differing philosophies and governing styles is essential to a functioning democracy, the current environment inside the ‘beltway’ has degenerated to the point of stagnation.  Neither side of the proverbial ‘aisle’ appears, at least publically, willing to compromise with Republicans declaring their resolve to avoid tax rate increases of any kind, and Democrats extolling the need to increase the percentage paid by the top income earners in the country.  It is impossible to know how much of the recent rhetoric is simply political posturing and how much represents entrenched positions, but what is evident is that it has created an atmosphere of uncertainty which financial markets abhor. One potential area of concession, that has lately developed, is the rate of increase Democrats are seeking.  Although it had been earlier suggested that a return to the 39.6% level last seen under President Bill Clinton was all that would be accepted, that stance has softened in recent days,(Strategas Research Partners), suggesting that a smaller increase could be where an accord is found.

As I am writing this morning, leaders from both political parties are preparing to meet at the White House to begin negotiations on bridging the gap that divides them.  If they are successful in their efforts and common ground is reached, even on a temporary basis, which is the most plausible scenario, we should see a strong rebound across financial markets.  While the process of resolving the differences that separate the two sides of this debate will undoubtedly take time and potentially create turbulence in the marketplace, if our policy makers can fulfill their responsibilities and find a resolution to this issue it will greatly strengthen the recovery in the global economy and lead to a substantive rally in risk based assets.

The Implications Of The 2012 Presidential Election

This Tuesday marked the end of the 2012 Presidential Election campaign, with Barack Obama heading back to the White House.  In a campaign marked by elements of vitriol and an astronomical amount of money spent, most experts ballpark it around $6 billion in total, the results were status quo.   Republicans maintained their majority in the House, while the Democrats, after picking up a few surprise seats, remain in control of the Senate and Presidency.

As the new(ish) regime begins to game-plan for the next four years, a number of issues to address lay in wait.  The first, and potentially most significant, is the fiscal cliff the government must face before January 1, 2013.  With the Bush-era tax cuts expiring in conjunction with spending cuts, the U.S. economy will see about a 4% drag on GDP, forcing policymakers to address the looming recession.  The most likely scenario is an extension of most of the provisions already in place, which would result in a drag on GDP closer to 1%.

A key proponent in all of this is a compromise of tax increases on high-income earners—a significant area of compromise for President Obama. It would seem that the majority of investors are anticipating such a short-term deal to take place, but if no deal is signed before the end of the year, the market will react to the disappointment.

Next on tap for the President is a defined, long-term fiscal package. And while it will be a difficult task with a split government, it has been done before.  It is important for investors to have a roadmap to address our fiscal issues as it would reduce uncertainties, provide businesses and consumers with a higher level of confidence, and ultimately spend and contribute to positive growth. One strong point here is our high demand for U.S. Treasuries, even at current low rates.

With possible changes facing the Federal Reserve and tax increases, we are faced with a number of uncertainties.  We’ve crossed the election off our list of concerns and now turn our heads to the fiscal cliff. So as we head into year end, we will prepare for market volatility while keeping a close eye on what Congress is planning.

Becoming an Obvious Expert Beverly D. Flaxington for Brinker Capital

One of the best ways for financial advisors to generate new business is to become “known”. Known as the expert, as the advisor with insights, and as the person who has something important to say. Many investors like to work with someone they perceive as knowledgeable and well-rounded.
How best to become an obvious expert? The first important piece is to be seen and heard. This can be done through using a PR (public relations) strategy and through social media. PR includes things like being interviewed on radio and television, being written about in newspapers and periodicals, and issuing press releases or other news stories. Social media includes things like LinkedIn, Twitter and Facebook, and means engaging in online discussion and information boards to talk about your expertise.
Some advisors shy away from the media because they don’t know what to say. As a first step, think about what interesting angles you can address relative to important topics in the news. Don’t limit your thinking to just the stock and bond market movements; think about trends for retirees and/or divorcees, multi-generational issues, or any other newsworthy trend that can connect back to your process or philosophy with regard to investing or planning.
Consider some of the following to establish your credibility as the obvious expert:
(1) Radio and television interviews are “free” advertising. Read and watch different journalists and reporters. Find out what they often report on. Write an email or a note to respond to some information they’ve given and your angle on their story. Make friends with your local media. Reporters and journalists are looking for new, fresh angles all the time.
(2) If you want to put more effort into it, consider doing your own blog talk radio show. You can pay a nominal fee to get set up on one of the major networks such as Live365 or blogtalkradio. With your own show you are responsible for coming up with content for each program, but you can always leverage other relationships such as COIs (Centers of Influence) like realtors, attorneys or accountants. Having your own show means you would be the interviewer instead of the interviewee. However, it allows you to get your thoughts and ideas across to an audience each week or month, depending on the show schedule.
(3) Create audio or video recordings of any interviews you have, or just record yourself telling case stories about how you work with clients. Circulate the audio or video to the press and also post it on your website.
(4) Issue a press release about something interesting happening at your firm. This could be the launch of a new website, a new angle on your service offerings, or a new hire to your firm. Anything happening at your firm can be newsworthy. Send press releases out over many of the free services available, such as this or this
(5) Engage in social media. As you pursue relationships with the younger generation (i.e. anyone under 40 years of age), they will immediately search you out on Google or some other engine to find whatever they can about you. It’s imperative to have a presence of some kind. Have an updated LinkedIn account, follow people on Twitter or create an account, if your compliance department allows it. Have a blog if you can, or at minimum post to other’s blogs when you have a response or idea to share.
Put a focus on becoming known, being seen and staying out in the public eye.

There are many opportunities to do so. Consider the ones that are right for your practice.