Investment Insights Podcast: Despite the number of headlines last week, markets proved their resilience

Rosenberger_Podcast

Andrew Rosenberger, CFA, Senior Investment Manager

 

On this week’s podcast (recorded April 10, 2017), Andy discusses sentiment, job growth, and earnings season.

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Quick hits:

  • Despite the number of headlines last week (Syria, China, France, Jobs), markets proved their resilience by finishing the week flat.
  • Sentiment has come down from peak optimism seen in February.
  • Despite the weakness in the headline number, the underlying trends in job growth continue to be favorable.
  • Earnings season kicks off this week with Financials being the first group up.  Investors are looking for comments on loan growth & loan demand.
  • We continue to favor an overweight to risk assets within our discretionary portfolios.

For Andy’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: Under the radar risks that we’re watching

Rosenberger_PodcastAndrew Rosenberger, CFA, Senior Investment Manager

On this week’s podcast (recorded December 19, 2016), Andy discusses how we’re entering the most seasonally strong period of the calendar, and a few under the radar risks that Brinker Capital is watching. Quick hits:

  • Sentiment, is looking a bit too optimistic.
  • The U.S. Dollar has broken out to highs not last seen since 2003.
  • There has been a sense of moving away from globalization in the form of populism.
  • Markets are trading at levels notably higher than they were.
  • Clients are underexposed to risk in general for one reason or another.

For Andy’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: Outlook Positive Despite Rate Hike Possibility

magnotta_headshot_2016Amy Magnotta, CFASenior Investment Manager, Brinker Capital

On this week’s podcast (recorded September 9, 2016), Amy reviews how the markets performed during August and provides an outlook to what’s ahead. Here a few quick hits before you listen:

  • August was a relatively calm month for financial markets. Large cap developed market equities eked out small gains, while emerging markets, high-yield bonds and small caps fared better.
  • U.S. economic data releases have been mixed, but lean positive. Yet, with better economic data comes the possibility of an additional Fed interest rate hike sooner rather than later.
  • While the possibility of a rate hike could adversely affect markets in the near term, it doesn’t change our positive intermediate-term outlook.
  • Risks facing the economy include the potential for a central bank policy mistake, uncertainty surrounding the upcoming presidential election, and disappointing economic growth outside of the U.S.
  • We expect higher volatility to continue as we digest the actions of global central banks, but our view on risk assets still tilts positive over the intermediate term. Increased volatility often leads to pockets of attractive opportunities.

Click here to listen to Amy’s 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, Inc., 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 – Crisis in High-Yield Markets?

miller_podcast_graphicBill Miller, Chief Investment Officer

On this week’s podcast (recorded December 11, 2015), we look at Third Avenue’s high-yield fund collapse and its potential impact on the market as a whole. This week we lead with what we don’t like:

What we don’t like: Investor fear has risen with the closure of the Third Avenue Focused Credit Fund; belief now that there are wider problems in the high-yield markets; issues and pressure stem from the energy sector as oil prices have fallen a lot; larger fear that this will spread to the economy as a whole; investors will be looking across all sectors for potential problems

What we like: We tend to believe this is more contained and hopeful that there will be better opportunities in the high-yield space in the near future;

What we’re doing about it: Continue to maintain within high-yield while keeping an eye on investor sentiment

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.

Monthly Market And Economic Outlook: November 2015

Amy MagnottaAmy Magnotta, CFASenior Investment Manager, Brinker Capital

The market correction in the third quarter, prompted by the Federal Reserve’s decision to stay on hold and worries over China, resulted in investor sentiment reaching levels of extreme pessimism. Risk appetites returned in October and global equity markets rebounded sharply. The start to earnings season was also better than expected. With a gain of +8.4%, the S&P 500 Index posted its third-highest monthly return since 2010, bringing the index back into positive territory for the year. Fixed income markets were relatively flat, but high yield and emerging market debt experienced a rebound in the risk-on environment. Year to date through October, the S&P 500 Index leads both international equity and fixed income markets, a headwind for diversified portfolios.

Within the U.S. equity market sector leadership shifted again but all sectors were in positive territory. The energy and materials sectors, which have weighed significantly on index returns this year, both experienced double-digit gains for the month as crude oil prices stabilized. The more defensive consumer staples and utilities sectors underperformed. Large caps outpaced small and mid-caps, and the margin of outperformance for growth over value continued to widen.

International developed equity markets kept pace with U.S. equity markets in October despite a slight strengthening in the U.S. dollar. Performance in Japan and Europe was boosted on expectations of additional monetary easing. Emerging markets were only slightly behind developed markets, helped by supportive monetary and fiscal policies in China and stabilizing commodity prices. All regions were positive but performance was mixed, with Indonesia gaining more than +15% while India gained less than +2%.

U.S. Treasury yields moved slightly higher during October, and they have continued their move upward as we have entered November. Investment-grade fixed income was flat for the quarter and has provided modest gains so far this year. Municipal bonds outperformed taxable bonds. After peaking at a level of 650 basis points in the beginning of the month, the increase in risk appetite helped high yield spreads tighten more than 100 basis points and the asset class gained more than 2%. Spreads still remain wide relative to fundamentals.

Our outlook remains biased in favor of the positives, but recognizing risks remain. The global macro backdrop keeps us positive on risk assets over the intermediate-term, even as we move through the second half of the business cycle. 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 patient and data dependent. The ECB and the Bank of Japan have both executed bold easing measures in an attempt to support their economies. Emerging economies have room to ease.
  • U.S. growth stable and inflation tame: U.S. GDP growth, while muted, remains positive. Employment growth is solid as the unemployment rate fell to 5%. Wage growth has been tepid at best despite the tightening labor market, and reported inflation measures and inflation expectations remain below the Fed’s target.
  • U.S. companies remain in decent shape: M&A deal activity continues to pick up as companies seek growth. Earnings growth outside of the energy sector is positive, but margins, while resilient, have likely peaked for the cycle.
  • Washington: Policy uncertainty is low and all parties in Washington were able to agree on a budget deal and also raised the debt ceiling to reduce near-term uncertainty. With the new budget fiscal policy is poised to become modestly accommodative, helping offset more restrictive monetary policy.

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

  • Fed tightening: After delaying in September, expectations are for the Fed to raise the fed funds rate December. The subsequent path of rates is uncertain and may not be in line with market expectations, which could lead to increased 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. A significant slowdown in China is a concern, along with slower growth in other emerging economics like Brazil.
  • Geopolitical risks could cause short-term volatility.

While the equity market drop was concerning, we viewed the move as more of a correction than the start of a bear market. The worst equity market declines are associated with recessions, which are preceded by substantial central bank tightening or accelerating inflation. As described above, we don’t see these conditions being met yet today. The trend of the macro data in the U.S. is still positive, and a significant slowdown in China, which will certainly weigh on global growth, is not likely enough to tip the U.S. economy into contraction. Even as the Fed begins tightening monetary policy later this year, the pace will be measured as inflation is still below target. While we expect a higher level of volatility as the market digests the Fed’s actions and we move through the second half of the business cycle, we remain positive on risk assets over the intermediate term. Increased volatility creates opportunities that 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 – October 16, 2015

miller_podcast_graphicBill Miller, Chief Investment Officer

On this week’s podcast (recorded October 16, 2015):

What we like: Fed preaching lower interest rates for longer periods extends friendly monetary policy; Consumer sentiment higher than expected and may indicate potential higher sales and earnings for retailers during holiday season

What we don’t like: Sales growth generally weak; Walmart missed earnings; need growth for stocks to go higher

What we’re doing about it: Looking for positive signs of growth, perhaps that’s consumer sentiment

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: December 2014

Amy MagnottaAmy Magnotta, CFASenior Investment Manager, Brinker Capital

Global equity markets were positive in November, helped by optimism over the prospect of additional monetary policy easing in Japan and Europe. U.S. equity markets posted another solid monthly gain, led by large and mid cap growth companies. The energy sector was down more than -8% due to the collapse in oil prices after OPEC decided not to cut output. However, the expectation of higher disposable incomes as a result of lower gasoline prices helped push the consumer sectors higher in November.

International equities lagged U.S. equity markets again in November. The S&P 500 Index has gained almost 14% year to date through November, while the MSCI All Country World ex USA Index is flat. The U.S. dollar, which has gained over 10% so far this year, has also been a contributor. Developed market equities fared better than emerging markets in November. European equities reacted positively to the expectation that the ECB would soon announce a full scale quantitative easing program. Within emerging markets, equity market gains in China and India were offset by weak performance in Brazil and Russia.

outlook_chartDespite stronger economic data, longer-term U.S. Treasury yields continue to move lower, while rates on the shorter end of the curve were unchanged to slightly higher, resulting in a flattening yield curve. From the beginning of November through December 12, the yield on the 10-year note fell 25 basis points to 2.10% and the yield on the 30-year bond fell 32 basis points to 2.75%. The yield on the 2-year note rose 6 basis points over that same period. The Barclays Aggregate Index was up +0.7% for the month, led by government bonds.

The negative sentiment surrounding the energy sector has weighed significantly on the high yield asset class. Energy represents 13% of the Barclays High Yield Index, up from 6% of the index in 2008. The credit issues outside of the energy sector have been limited, and should the economy continue to grow, current spread levels (525 basis points above Treasuries which we last saw in December 2012) look more attractive.

Our macro outlook has not changed. When weighing the positives and the risks, we continue to believe the balance is shifted even more in favor of the positives over the intermediate-term and the global macro backdrop is constructive for risk assets. As a result our strategic portfolios are positioned with an overweight to overall risk. A number of factors should support the economy and markets over the intermediate term.

  • Global monetary policy remains accommodative: Even with QE complete Fed policy is still accommodative. U.S. short-term interest rates should remain near-zero until mid-2015 if inflation remains contained. The ECB stands ready to take even more aggressive action to support the European economy, and the Bank of Japan expanded its already aggressive easing program.
  • Pickup in U.S. growth: Economic growth in the U.S. has picked up. Companies are starting to spend on hiring and capital expenditures. Both manufacturing and service PMIs remain in expansion territory. Housing has been weaker, but consumer and CEO confidence are elevated.
  • U.S. companies remain in solid shape: U.S. companies have solid balance sheets that are with cash. M&A deal activity has picked up this year. Earnings growth has been ahead of expectations 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. Fiscal drag will not have a major impact on growth this year, and the budget deficit has also declined significantly. Government spending will again become a contributor to GDP growth in 2015.

Risks facing the economy and markets remain, including:

  • Timing of Fed tightening: QE ended without a major impact, so concern has shifted to the timing of the Fed’s first interest rate hike. While economic growth has picked up and the labor market has shown steady improvement, inflation measures and inflation expectations remain contained.
  • Global growth: While growth in the U.S. has picked up more recently, growth outside the U.S. is decidedly weaker. Both the OECD and IMF have downgraded their forecasts for global growth.
  • Geopolitical risks: The geopolitical impact of the significant drop in oil prices, as well as issues in the Middle East and Ukraine, could cause short-term volatility.

Despite levels of investor sentiment that have moved back towards optimism territory and valuations that are close to long-term averages, we remain positive on equities for the reasons previously stated. In addition, seasonality and the election cycle are in our favor. The fourth quarter tends to be bullish for equities, as well as the 12-month period following mid-term elections.

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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.

 

An End to Complacency

Joe PreisserJoe Preisser, Portfolio Specialist, Brinker Capital

Volatility abruptly made an entrance onto the global stage, shoving aside the complacency that has reigned over the world’s equity markets this year as they have marched steadily from record high to record high. Asset prices were driven sharply lower last week, as gathering concerns that the Federal Reserve Bank of the United States may be closer than anticipated to raising interest rates, combined with increasing worries about the possibility of deflation in the Eurozone, and a default by the nation of Argentina, to weigh heavily on investor sentiment. The selling seen across equity markets last Thursday was particularly emphatic, with declining stocks listed on the NYSE outpacing those advancing by a ratio of 10:1, and the Chicago Board Options Exchange Volatility Index (VIX), which measures expected market volatility, climbing 25% to its highest point in four months, all combining to erase the entirety of the gains in the Dow Jones Industrial Average for the year.

Preisser_Complacency_8.4.14The looming specter of the termination of the Federal Reserve’s bond-buying program, which is scheduled for October, is beginning to cast its shadow over the marketplace as this impending reality, coupled with fears that the Central Bank will be forced to raise interest rates earlier than expected, has served to raise concerns. Evidence of this could be found last Wednesday, where, on a day that saw a report of Gross Domestic Product in the United States that far exceeded expectations, growing last quarter at an annualized pace of 4%, vs. the 2.1% contraction seen during the first three months of the year, and a policy statement from the Federal Reserve which relayed that, “short-term rates will stay low for a considerable time after the asset purchase program ends” (Wall Street Journal) equity markets could only muster a tepid response. It was the dissenting voice of Philadelphia Fed President, Charles Plosser who opined that, “the guidance on interest rates wasn’t appropriate given the considerable economic progress officials had already witnessed” (Wall Street Journal), which seemed to resonate the loudest among investors, giving them pause that this may be a signal of deeper differences beginning to emerge within the Federal Open Market Committee. Concern was further heightened on Thursday morning of last week, when a report of the Employment Cost Index revealed an unexpected increase to 0.7% for the second quarter vs. a 0.3% rise for the first quarter (New York Times), which stoked nascent fears of inflation, bolstering the case for the possibility of a more rapid increase in rates.

Negative sentiment weighed heavily on equity markets outside of the U.S. as well last week, as the possibility of deflationary pressures taking hold across the nations of Europe’s Monetary Union, combined with ongoing concerns over the situation in Ukraine and the second default in thirteen years by Argentina on its debt to unsettle market participants. According to the Wall Street Journal, “Euro-zone inflation increased at an annual rate of just 0.4% in July, having risen by 0.5% the month before. In July 2013 the rate was 1.6%” While a fall in prices certainly can be beneficial to consumers, it is when a negative spiral occurs, as a result of a steep decline, to the point where consumption is constrained, that it becomes problematic. Once these forces begin to take hold, it can be quite difficult to reverse them, which explains the concern it is currently generating among investors. The continued uncertainty around the fallout from the latest round of sanctions imposed on Russia, as a result of the ongoing conflict in Ukraine, further undermined confidence in stocks listed across the Continent and contributed to the selling pressure.

ArgentinaInto this myriad of challenges facing the global marketplace came news of a default by Argentina, after the country missed a $539 interest payment, marking the second time in thirteen years they have failed to honor portions of their sovereign debt obligations. The head of research at Banctrust & Co. was quoted by Bloomberg News, “the full consequences of default are not predictable, but they certainly are not positive. The economy, already headed for its first annual contraction since 2002 with inflation estimated at 40 percent, will suffer in a default scenario as Argentines scrambling for dollars cause the peso to weaken and activity to slump.”

With all of the uncertainty currently swirling in these, “dog days of summer,” it is possible that the declines we have seen of late may be emblematic of an increase in volatility in the weeks to come as we move ever closer to the fall, and the terminus of the Fed’s asset purchases.

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: February 2014

Amy MagnottaAmy Magnotta, CFA, Senior Investment Manager, Brinker Capital

After such a strong move higher in 2013, U.S. equity markets took a breather in January as the S&P 500 Index fell -3.5%. Volatility returned to the markets as concerns over the impact of Fed tapering and emerging economies weighed on investors. Investor sentiment, a contrarian indicator, had also climbed to extreme optimism levels, leaving the equity markets ripe for a short-term pullback.

In U.S. equity markets, the utilities (+3%) and healthcare (+1%) sectors delivered gains, while energy and consumer discretionary each declined -6%. Mid caps led both small and large caps in January, helped by the strong performance of REITs. Fourth quarter 2013 earnings season has been decent so far. Of the one-third of S&P 500 companies reporting, 73% have beat expectations.

U.S. equity markets led international markets in January, helped by a stronger currency. Performance within developed markets was mixed, with peripheral Europe outperforming (Ireland, Italy, Spain, Portugal), while Australia, France and Germany lagged.

Emerging markets equities significantly lagged developed markets in January, as the impact of Fed tapering, slower economic growth and higher inflation weighed on their economies. Countries with large current account deficits have seen their currencies weaken significantly. Latin America saw significant declines, with Argentina down -24%, Chile down -12% and Brazil down -11%. Asia fared slightly better, with the region down less than -5%. Emerging Europe was dragged lower with double-digit losses in Turkey.

Fixed income had a solid month of performance as interest rates fell across the yield curve. The 10-year Treasury note is now trading around 2.6%, 40 basis points lower than where it started the year. The Barclays Aggregate Index gained +1.5% in January, its best monthly return since July 2011. All major sectors were in positive territory for the month; however, higher-quality corporates led high yield. Municipal bonds edged out taxable bonds and continue to benefit from improving fundamentals.

We believe that the bias is for interest rates to move higher, but it will likely be choppy. Rising longer-term interest rates in the context of stronger economic growth and low inflation is a satisfactory outcome. Despite rising rates, fixed income still plays a role in portfolios, as a hedge to equity-oriented assets if we see weaker economic growth or major macro risks as experienced in January. Our fixed income positioning in portfolios, which includes an emphasis on yield advantaged, shorter duration and low volatility absolute return strategies, is designed to successfully navigate a rising or stable interest rate environment.

We continue to approach our macro view as a balance between headwinds and tailwinds. We believe the scale remains tipped in favor of tailwinds as we move into 2014, with a number of factors supporting the economy and markets over the intermediate term.

  • Monetary policy remains accommodative: Even with the Fed beginning to taper asset purchases, short-term interest rates should remain near zero until 2015. In addition, the ECB stands ready to provide support, and the Bank of Japan has embraced an aggressive monetary easing program in an attempt to boost growth and inflation.
  • Global growth strengthening: U.S. economic growth has been slow and steady, but momentum picked up in the second half of 2013. Outside of the U.S., growth has not been very robust, but it is still positive.
  • Labor market progress: The recovery in the labor market has been slow, but stable. Monthly payroll gains have averaged more than 200,000, and the unemployment rate has fallen to 7%.
  • Inflation tame: With the CPI increasing +1.5% over the last 12 months, inflation in the U.S. is running below the Fed’s target.
  • Increase in Household Net Worth: Household net worth rose to a new high in the third quarter, helped by both financial and real estate assets. Rising net worth is a positive for consumer confidence and future consumption.
  • U.S. companies remain in solid shape: U.S. companies have solid balance sheets with cash that could be reinvested, returned to shareholders, or used for acquisitions. Corporate profits remain at high levels and margins have been resilient.
  • Equity fund flows turned positive: Equity mutual funds have experienced inflows over the last three months while fixed income funds have experienced significant outflows, a reversal of the pattern of the last five years. Continued inflows would provide further support to the equity markets.
  • Some movement on fiscal policy: After serving as a major uncertainty over the last few years, there seems to be some movement in Washington. Fiscal drag will not have a major impact on growth next year. All parties in Washington were able to agree on a two-year budget agreement, averting another government shutdown. However, the debt ceiling still needs to be addressed.

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

  • Fed Tapering: The Fed will begin reducing the amount of their asset purchases in January, and if they taper an additional $10 billion at each meeting, QE should end in the fall. Risk assets have historically reacted negatively when monetary stimulus has been withdrawn; however, the economy appears to be on more solid footing this time and the withdrawal is more gradual. The reaction of emerging markets to Fed tapering is cause for concern and will contribute to higher market volatility.
  • Significantly higher interest rates: Rates moving significantly higher from current levels could stifle the economic recovery. Should mortgage rates move higher, it could jeopardize the recovery in the housing market.

Risk assets should continue to perform if real growth continues to recover; however, we could see volatility as markets digest the slow withdrawal of stimulus by the Federal Reserve. Valuations have certainly moved higher, but are not overly rich relative to history. There are even pockets of attractive valuations, such as emerging markets. We are not surprised that we have experienced a pull-back in equity markets to start the year as investor sentiment was elevated and it had been an extended period of time since we last experienced a correction. However, we expect it to be more short-term in nature and maintain a positive view on equities for the year.

Magnotta_Market_Update_2.7.14

We feel that 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 ReturnsAsset Class Returns

Data points above compiled from FactSet, Standard & Poor’s, MSCI, and Barclays. Asset Class Returns data compiled from FactSet and Red Rocks Capital. The views expressed are those of Brinker Capital and are for informational purposes only. Holdings subject to change