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: October Market & Economic Outlook

magnotta_headshot_2016Amy Magnotta, CFASenior Investment Manager, Brinker Capital

On this podcast, Amy reviews third quarter market activity and the themes to monitor for the rest of the year. Here are some quick hits before you have a listen:

  • The third quarter was marked by a continuation of muted global growth with risk assets posting solid returns.
  • Expectations for the next Fed rate hike moved further out on the calendar from September to December, further fueling risk assets. Fed rhetoric may create the dynamic where “good news is bad news.”
  • U.S. economic data releases have been mixed, but lean positive. Stronger wage growth, low inflation and low unemployment levels leads us to believe that while we are likely late in the business cycle, there is still room for growth before the next recession.

Click here to listen to the full podcast. A PDF version of Amy’s commentary is available to download as well. Find it here >>

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. Brinker Capital Inc., a Registered Investment Advisor.

Investment Insights Podcast – Brazil: Does Rousseff’s Impeachment Muddy the Future?

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

On this week’s podcast (recorded May 16, 2016), Stuart discusses what the President of Brazil’s impeachment means for the near-term future of the country. If you missed Stuart’s initial framework around Brazil, you can catch up here first.

As discussed, why talk about Brazil?

  • It’s the largest economy in Latin America.
  • It’s the eighth largest economy in the world.
  • For the last several years, it’s been a large drag on emerging market economic growth.
  • There is potential to have a positive impact with the recent shock to the political system.

What does Rousseff’s impeachment announcement entail?

  • Brazilian senate approved in large majority to impeach President Dilma Rousseff and replace with Vice President Michel Temer.
  • General elections to take place in 2018, and with the Olympics in Rio a few months away, the window for the government to pass reforms is short.
  • Rousseff is the third president to be impeached since 1992.
  • Key test will be whether such enthusiasm for impeaching Rousseff will apply to tough votes on fiscal reform needed to restore economic confidence in Brazil.

What’s the upside with Temer?

  • Michel Temer has already named a cabinet that includes former president of the Central Bank of Brazil, Henirque Meirelles
  • Meirelles presided over the strong Brazilian economy during the two terms of former President Lula prior to Rousseff taking office.
  • The government deficit lies at the heart of what ails Brazil and might improve under the right circumstances.

How does the government begin to reign in the deficit?

  • Debt to GDP is growing 10% a year.
  • The government, simply put, must raise revenues and cut expenditures; but, this is easier said than done.
  • Higher taxes are troublesome and could stunt the already weak economy.
  • One tax likely to be reintroduced is a basis point tax on financial transactions, which should have a high success rate in collecting revenues, but it also could dampen economic activity.
  • Expenditures could be difficult to reduce given legal restrictions and the still-fragile political situation.
  • Fiscal expenditures offer the potential to improve the fiscal situation, but it is also the most susceptible to politics.

 Where does Brazil stand now?

  • Given that Temer has an approval rating just barely above that of Rousseff¹, it is unclear whether he has enough political capital to push through needed reforms.
  • The ongoing corruption investigations known as Carwash potentially affects politicians of all stripes.
  • Opposing interests in Congress might find it in their own self-interest to “bite the bullet” on passing just enough reforms to stabilize the country in time for new elections in 2018.
  • In short, while the economic obstacles are challenging, it is possible to see improvement in the fiscal balances.

Please click here to listen to the full 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.

May 2016 Monthly Market And Economic Outlook

Amy MagnottaAmy Magnotta, CFASenior Investment Manager, Brinker Capital

Continuing the rally that began in mid-February, risk assets posted modest gains in April, helped by more dovish comments from the Federal Reserve and further gains in oil prices. Expectations regarding the pace of additional rate hikes by the Fed have been tempered from where they started the year. Economic data releases were mixed, and while a majority of companies beat earnings expectations, earnings growth has been negative year over year.

The S&P 500 Index gained 0.4% for the month. Energy and materials were by far the strongest performing sectors, returning 8.7% and 5.0% respectively. On the negative side was technology and the more defensive sectors like consumer staples, telecom and utilities. U.S. small and micro-cap companies outpaced large caps during the month, and value continued to outpace growth.

International equity markets outperformed U.S. equity markets in April, helped by further weakness in the U.S. dollar. Developed international markets, led by solid returns from Japan and the Eurozone, outpaced emerging markets. Within emerging markets, strong performance from Brazil was offset by weaker performance in emerging Asia.

The Barclays Aggregate Index return was in line with that of the S&P 500 Index in April. Treasury yields were relatively unchanged, but solid returns from investment grade credit helped the index. High-yield credit spreads continued to contract throughout the month, leading to another month of strong gains for the asset class.

We remain positive on risk assets over the intermediate-term; however, we acknowledge that we are in the later innings of the bull market that began in 2009 and the second half of the business cycle. The worst equity market declines are typically associated with recessions, which are preceded by aggressive central bank tightening or accelerating inflation, factors which are not present today.  While our macro outlook is biased in favor of the positives and a near-term end to the business cycle is not our base case, the risks must not be ignored.

A number of factors we find supportive of the economy and markets over the near term.

Global monetary policy remains accommodative: The Fed’s approach to tightening monetary policy is patient and data dependent.  The Bank of Japan and the ECB have been more aggressive with easing measures in an attempt to support their economies, while China may require additional support.

Stable U.S. growth and tame inflation: U.S. economic growth has been modest but steady. While first quarter growth was muted at an annualized rate of +0.5%, we expect to see a bounce in the second quarter as has been the pattern. Payroll employment growth has been solid and the unemployment rate has fallen to 5.0%. Wage growth has been tepid at best despite the tightening labor market, and reported inflation measures and inflation expectations, while off the lows, remain below the Fed’s target.

U.S. fiscal policy more accommodative: With the new budget, fiscal policy is poised to become modestly accommodative in 2016, helping offset more restrictive monetary policy.

Constructive backdrop for U.S. consumer: The U.S. consumer should see benefits from lower energy prices and a stronger labor market.

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

Risk of policy mistake: The potential for a policy mistake by the Fed or another major central bank is a concern, and central bank communication will be key. In the U.S. the subsequent path of rates is uncertain and may not be in line with market expectations, which could lead to increased volatility. Negative interest rates are already prevalent in other developed market economies. An event that brings into question central bank credibility could weigh on markets.

Slower global growth: Economic growth outside the U.S. is decidedly weaker, and while China looks to be improving, a significant slowdown remains a concern.

Another downturn in commodity prices: Oil prices have rebounded off of the recent lows and lower energy prices on the whole benefit the consumer; however, another significant leg down in prices could become destabilizing. This could also trigger further weakness in the high yield credit markets, which have recovered since oil bottomed in February.

Presidential Election Uncertainty: The lack of clarity will likely weigh on investors leading up to November’s election. Depending on the rhetoric, certain sectors could be more impacted.

The technical backdrop of the market has improved, as have credit conditions, while the macroeconomic environment leans favorable. Investor sentiment moved from extreme pessimism levels in early 2016 back into more neutral territory. Valuations are at or slightly above historical averages, but we need to see earnings growth reaccelerate. We expect a higher level of volatility as markets assess the impact of slower global growth and actions of policymakers; but our view on risk assets still tilts positive over the near term. Higher volatility has led to attractive pockets of opportunity we can take advantage of as active managers.

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. 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. Brinker Capital Inc., a Registered Investment Advisor.

Investment Insights Podcast – Leading Indicators Report Strong Economy

miller_podcast_graphicBill Miller, Chief Investment Officer

On this week’s podcast (recorded April 1, 2016), Bill reports again on the importance of leading indicators and what they are showing in terms of the stability of the economy and if a recession is likely:

What we like: Investors should focus on leading indicators; good economic data to report: order rates for manufacturing strong; employment data continues to be positive; wages are increasing; recession happening this year becomes less likely with strong data from these leading indicators

What we don’t like: On the contrary, the strong data makes a larger case for higher interest rates; with wage and labor reports positive, Fed may act on their mandate and the interest rate discussion heats up

What we’re doing about it: Portfolios will maintain the theme of interest rate normalization

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 – Central Banks Back Economies

miller_podcast_graphicBill Miller, Chief Investment Officer

On this week’s podcast (recorded March 17, 2016), Bill explains why recession concerns should continue to lessen and what to expect from the upcoming earnings season:

What we like: Recent Wall Street Journal survey indicates that investors are becoming less fearful of a recession; that trend should continue as central banks across the world are firmly standing by their economies–Janet Yellen most recently

What we don’t like: Second quarter earnings season likely to have residual effects from the weak first quarter; markets may trend sideways for a time; corporations have been the largest buyers of stock but have to step aside during earnings season

What we’re doing about it: Continuing to look for opportunities within high-yield, energy and natural resources

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.

60% of the Time, It Works Every Time

Solomon-(2)Brad Solomon, Junior Investment Analyst

“Bonds Show 60% Odds of Recession.”

It was a bold, slightly jarring headline to an article I happened across one recent morning. I had done a solid minute of skimming before I scrolled back to the top and noticed the published date—October 22, 2011.  If the models cited in the article had bet their chips on red, so to say, then the U.S. economy continued to hit black for some time.  Over the next four years, the domestic unemployment rate nearly halved while the S&P 500 returned a cumulative 84%.  Say what you want about much of that return being multiple expansion (84% total return on cumulative earnings per share growth of 16%)—it would’ve been a tough four years for investors to sit on the sidelines.

I’m writing this from an investment perspective rather than an academic one, but it is still a preoccupation for both fields to monitor to the economy.  Why?—because, as quantified by Evercore ISI, S&P 500 bear markets have been more severe (-30%) when they predate what actually morphs into an economic recession versus times when dire signs of economic stress do not ultimately turn up (-15%).

The world is once again on “recession watch” in 2016; signs of financial strain include the offshore weakening of China’s yuan, widening credit spreads, an apparent peak in blue chip earnings per share, and spiking European bank credit default swaps (CDSs).  One telling recession indicator, yield curve inversion, has seemingly not reared its head.  As measured through the difference between 10-year and 3-month Treasury yields, the spread today stands around 150 basis points, while it has fallen like clockwork to zero or below prior to each U.S. recession since 1956. (Recessions are indicated by the shaded grey areas below, as defined by the NBER.)

Source: The Federal Reserve, Brinker Capital

Source: The Federal Reserve, Brinker Capital

A number of commentators have raised concerns that the statistics above should not warrant an “all clear” sense of thinking there won’t be a recession.  In full awareness of the folly of claiming that “this time is different”—well, this time may be different.  Breaking down the term spread into its two components—the yield on a shorter-dated bill and longer-dated bond—the short rates have been artificially held down by a zero-bound federal funds rate for the past six years, while the feature of positive convexity that is inherently more pronounced for long rates means that it is, in theory, very tough to close the gap” on the remaining 150 basis point spread that would indicate an inverted yield curve mathematically.  (A convexity illustration is shown below—the takeaway is that the yield-price relationship becomes asymptotic at high prices, meaning that the 10-year note would need to be exorbitantly bid up to bring its yield down to equate with much shorter maturities.)

Source: Brinker Capital

Source: Brinker Capital

So, what are the odds of a recession?  If it’s not clear yet, I’m not writing this to assign a current probability but rather to warn against viewing such a figure in isolation.  Following the logic illustrated in papers such as this one, statistical programs make it possible to truly fine-tune a model: plug in any number of explanatory vectors (time series variables such as industrial production or unemployment claims) and “fit” the historical data to the response variable, which is essentially a switch that is “on” during a recession” and “off” when not.  But as calibrated as the model becomes, there is still subjectivity involved: what is the proper “trigger” for alarm?  Should your reaction to a 70% implied probability be different from your reaction to a 60% reading?  An important consideration is the objective behind such a model in the first place—to create a continuous distribution (infinite number) of outcomes and assign a probability to a discrete event (red or black, recession or no recession).  When framed this way, often it is the unquantifiable, intangible narratives and examination of what’s different this time (rather than what looks “the same”) that can create a fuller picture.

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 – Hope Springs Eternal

miller_podcast_graphicBill Miller, Chief Investment Officer

On this week’s podcast (recorded February 11, 2016), Bill addresses the current market climate and why there is reason to remain hopeful:

What we don’t like: Stocks are down around 10% in general; European stock markets are down even more; Asian markets down the most; it’s a tough environment for investors

What we like: We don’t believe this is a long-term bear market and don’t see a recession hitting the U.S.; labor and wages are positive; auto and housing is good as well; economy seems sturdy despite volatile market behavior; China poised to finalize five-year plan including lowering corporate tax rates and addressing government debt levels; ECB should start to show more support for its major banks

What we’re doing about it: Most of the damage is done; more sensible to see what we should buy or rotate into; hedged pretty fully in tactical products; staying the course in more strategic products

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.