Investment Insights Podcast: 2016 perspective & 2017 positives

Raupp_Podcast_GraphicJeff Raupp, CFA, Senior Vice President

On this week’s podcast (recorded January 9, 2017), Jeff puts some perspective on 2016 and touches on three positives we see for markets moving into 2017. Here are some quick hits before you have a listen:

 

  • 2016:
    • The recession fears that fueled one of the worst starts to a year seem a distant memory
    • In spite of the spike in rates to end the year, the Barclays Agg finished the year with a return of +2.6%
  • 2017 positives:
    • Global growth
    • Monetary and Fiscal Stimulus
    • Investor expectations remain muted

For Jeff’s full 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.

Investment Insights Podcast – What Indicators Are Indicating

miller_podcast_graphicBill Miller, Chief Investment Officer

On this week’s podcast (recorded February 18, 2016), Bill comments on what the leading indicators are showing in terms of the stability of the economy and if a recession is likely:

What we like: Leading indicators, published by Department of Commerce, are out and are important in understanding chances of recession; so far, indicators are showing a healthy economy with no recession likely at least in the next six months; stability in oil prices helping to calm the markets; China is actively supporting their economy

What we don’t like: We still need to hear about the ECB exposure to bad loans in China; need more clarity if the Fed will raise rates in March; there’s enough global trauma out there to make raising rates seem unwise

What we’re doing about it: Monitoring this rally period between now and the spring as economic activity is decent; may look to take longer tactical positions

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 – November 13, 2015

miller_podcast_graphicBill Miller, Chief Investment Officer

On this week’s podcast (recorded November 10, 2015):

What we like & what we don’t like: In a relatively unexpected move, it is now likely that the Fed will raise interest rates in 2015; this has both positive and negative implications; employment is strong as well as wage growth; but repaying loans back to U.S. gets more difficult

What we’re doing about it: Monitoring Fed policy; taking a slightly more conservative posture in our conservative models; looking to protect against downside risk

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.

Has Quantitative Easing Worked? A Two-Part Blog Series Perspective (Part II)

Solomon-(2)Brad Solomon, Junior Investment Analyst

Part two in a two-part blog series discussing quantitative easing measures on a domestic and global scale. Part one published last week.

Transmission to Main Street has been dubious.

The Fed’s FRB/US model, which is the workhorse behind quantifying QE’s transmission mechanisms into the general economy, forecasted a 0.2 percentage-point drop in unemployment over a 2-year time horizon as a result of a $500 billion LSAP, according to then-Fed governor Stein in 2012. Given that the cumulative scale of QE in the U.S. totaled around $4 trillion over about 4.4 years, excluding intermittent periods between buying sprees, the FRB/US model would then forecast a reduction in unemployment of 1.6 percentage points. (This assumes that there are no marginally diminishing returns to QE dollars.) Building in a “lag” of six months, the actual U.S. unemployment rate fell by 4.0 percentage points during this period and currently hovers near 5%, right above what is often pegged as the natural rate of unemployment. To what extent that reduction is due to QE, though, is very difficult to answer—there is no “control subject” in real-world experiments. The next-best-option is the event study that looks at variables prior to and following some stimulus, although this risks blending the effect with some other variable. While unemployment has fallen near its natural rate, anecdotal evidence speaks to widespread underemployment

Other metrics look either ambiguous or decidedly impressive. Across the U.S., U.K., Eurozone, and Japan, industrial production growth has been significantly more volatile than it was pre-recession; unemployment has fallen, with exception of the Eurozone where it has marched further upward after a double-dip recession in 2013; household saving as a percent of disposable income has come down substantially. Lack of healthy inflation has proven to be the fly in the ointment. Nearly 30 countries have explicitly adopted inflation targeting (around half of those in the last 15 years), but the majority continue to be plagued by nagging disinflation or outright deflation. Consider the poster child Japan who pioneered QE over the 2001-2006 period in its commitment to purchase $3-6 trillion in Japanese government bonds (JGBs) per month until core CPI became “stably above zero.” While the Bank of Japan wrapped up with the program in March 2006 after witnessing year-over-year core CPI in Japan clock in just above zero for three consecutive months, this was more of a mathematical win. Headline inflation over the period picked up solely due to a rapid rise in the price of crude oil, which arguably has little connection to monetary policy. This is not to say that some commentators have not already called for an indefinite deflationary environment, or that QE’s effects on the money supply don’t appear ambiguous.

Getting back to using the U.S. as an example, income growth has not followed the drop in unemployment, and inequality has persisted. Annualized growth rates since 2010 have been near zero and well below their long-term averages, and the lack of growth is particularly pronounced in the lower income quintiles.

Solomon_QE_4

On another front, record-low mortgage rates are undoubtedly a product of QE but have not translated into pre-2008 home buying, even in the presence of rising FICO scores and real home prices that are hovering around their 10-year trailing average. In fairness to QE, though, there simply seems to be a lack of a relationship between the cost of borrowing money to buy a home, and the demand for borrowing that money, as evidenced by the chart below.

Solomon_QE_5

QE’s efficacy seems to have varied case-by-case, and there is a growing consensus that there are diminishing marginal returns to QE.

Of this last point, Japan and the ECB should take note. While the Bank of Japan refrained from expanding its QE program at its meeting this past Friday above the current $670 billion p.a. rate, such expansion remains on the table for its November and December meetings. A similar decision faces the ECB in December, and the rhetoric of ECB President Mario Draghi has been mostly dovish in tone. (The annual rate of asset purchases by the ECB currently stands at about $816 billion.) While both banks will ultimately adhere to their mandates in trying to combat deflation and negative export growth, perhaps expectations should be set low for how effective further QE will be in meeting those mandates.

Proponents of real business cycle theory would not be surprised at much of the above—that is, that aggressive monetary policy has failed to override a general shift in appetites for home-buying, tepid supply-glut disinflation, reduced appetite by banks to lend, and the preference by businesses towards doing nothing productive with bond issuance besides repurchasing their own equity. These “exogenous” factors may overpower the stimulatory nature of QE, or the problem may be one of model specification. (Getting back to the home sales/mortgage rate example, QE may do its job of lowering borrowing rates, but this may not ultimately stoke home-buying appetites, which is a failure of the assumed indirect transmission mechanism that underlies QE’s founding.) Whatever the case, while it has helped solve short-run liquidity problems by injecting cash into the financial system, QE has proven sub-optimal in terms of being a cure-all to the woe of general economic lethargy.

Further reading

  1. Fawley, Brett & Christopher Neely. “Four Stories of Quantitative Easing.” (2013)
  2. Krishnamurthy, Arvind & Annette Vissing-Jorgensen. “The Ins and Outs of LSAPs.” (2013)
  3. Klyuev, Vladimir et. al. “Unconventional Choices for Unconventional Times.” (2009)
  4. McTeer, Robert. “Why Quantitative Easing May Not Work the Same Way in Europe as in the U.S.” (2015)
  5. Raab, Carolin et. al. “Large-Scale Asset Purchases by Central Banks II: Empirical Evidence.” (2015)
  6. Schuman, Michael. “Does QE Work? Ask Japan.” (2010)
  7. Stein, Jeremy. “Evaluating Large-Scale Asset Purchases.” (2012)
  8. Williams, John. “Monetary Policy at the Zero Lower Bound.” (2014)
  9. Williamson, Stephen D. “Current Federal Reserve Policy Under the Lens of Economic History.” (2015)
  10. Yardeni, Edward & Mali Quintana. “Global Economic Briefing: Central Bank Balance Sheets.” (2015)

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: May 2015

Amy MagnottaAmy Magnotta, CFASenior Investment Manager, Brinker Capital

In April we saw a reversal of some of what occurred in the first quarter. U.S. large cap equities were positive on the month (S&P 500 Index gained +1.0%); however, U.S. mid and small cap stocks experienced declines of -0.9% and -2.6% respectively. International developed equity markets continued to outperform U.S. markets (MSCI EAFE gained +4.2%), led by strong gains in Europe. The Euro strengthened 4.5% against the dollar during the month. Emerging markets led developed markets (MSCI EM gained +7.7%), helped by double-digit gains in China and Brazil. In the real assets space, crude oil soared +25% in April after an -11% decline in the first quarter, while REITs experienced modest declines.

Global sovereign yields moved higher in April. The yield on the 10-year Treasury climbed 11 basis points and as a result the Barclays Aggregate Index fell -0.4%. While investment-grade credit was negative on the month, high-yield credit gained +1.2% as spreads tightened. Municipal bonds underperformed taxable bonds during the month.

Our outlook remains biased in favor of the positives, but recognizing risks remain. We feel 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 remains solidly in positive territory and the labor market has markedly improved. Reported inflation measures and inflation expectations are moving higher but 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: 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.

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 +/- Favor global natural resources
Private Equity + Later in cycle

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.

Quantitative Easing Ad Infinitum?

Amy Magnotta, CFA, Brinker Capital

The Federal Open Market Committee (FOMC) launched an open-ended quantitative easing program yesterday. The Fed will purchase $40 billion of Agency mortgage-backed securities (MBS) per month with no specified end date. The Fed will continue its Operation Twist program through December, which includes the purchase of $45 billion per month of longer-dated Treasuries.

The MBS purchases will continue indefinitely until the outlook for the labor market improves “substantially,” which is a different approach than previous easing programs. The Fed also used a communication tool, stating that short-term rates will remain zero-bound until at least mid-2015 (instead of late-2014).

The Fed did not express any concern with inflation, stating it will likely run at or below its 2% objective over the medium term. However, the market is not convinced and inflation expectations moved up significantly after the announcement.

U.S. 5-Year Breakeven Inflation Rate (Source: Bloomberg)U.S. 5-Year Breakeven Inflation Rate

Gold (white) and Silver (orange) Prices (Source: Bloomberg)

The equity markets reacted positively, with the S&P 500 Index gaining +1.6% on the day. An open-ended quantitative easing program may be even more supportive for equities. It is clear the Fed is not ready to stop easing until they see more meaningful and sustainable growth. They want to see more of an improvement in the housing and labor markets. Low rates are here to stay. While the Fed’s actions will increase the risk appetite of investors, we still need help from fiscal policy before year end.

The full FOMC statement can be found here and their updated economic projections here.