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.

Investment Insights Podcast – February 25, 2015

Bill MillerBill Miller, Chief Investment Officer

On this week’s podcast (recorded February 24, 2015):

What we like: Yellen’s comments to Congress; supportive of economy; interest rates likely not to rise until later in the year; ECB buying sovereign bonds; Japan and China supportive of their economies; global synchronized expansion

What we don’t like: U.S. stocks getting more expensive; Apple stock at high altitude; additional valuations are high

What we’re doing about it: Keeping an eye open on when to add protection to some portfolios

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: February 2015

Amy MagnottaAmy Magnotta, CFASenior Investment Manager, Brinker Capital

Weaker earnings reports weighed on U.S. equity markets in January with the S&P 500 Index falling -3% during the month. Many companies pointed to the impact of the stronger U.S. dollar as a reason for the weakness. More defensive sectors, including utilities and healthcare, were able to post positive returns, while the financials and energy sectors fared the worst, the latter impacted by the continued decline in crude oil prices. From a market cap perspective mid caps led, helped by the solid gains in REITs. Outside of mid caps, growth stocks were noticeably ahead of value stocks.

International equities led U.S. equities in January despite a stronger U.S. dollar. Euro-area markets were particularly strong, gaining more than 7% in local terms, due to the announcement of the European Central Bank’s quantitative easing program, which exceeded expectations. Switzerland equities declined more than -6% during the month as their central bank dropped the Swiss franc’s peg to the euro. Emerging markets had modest gains in both local and USD terms, led by strong performance from India.

Global sovereign yields moved lower again during January. The 10-year Treasury note ended the month 50 basis points lower at a level of 1.68%. As a result of the rate move, long-term Treasuries gained more than 8%. All sectors of the Barclays Aggregate were positive on the month. High yield credit spreads stabilized in January and the sector gained 0.7%. Even at this level, U.S. Treasury yields still look attractive relative to the sovereign debt of other developed nations.

Our macro outlook remains unchanged. When weighing the positives and the risks, we continue to believe the balance is shifted 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 accommodation: We anticipate the Fed beginning to raise rates in mid-2015, but at a measured pace as inflation remains contained. The ECB has taken even more aggressive action to support the European economy, and the Bank of Japan’s aggressive easing program continues.
  • Pickup in U.S. growth: Economic growth has improved over the last few quarters. A combination of strengthening labor markets and lower oil prices are likely to provide the stimulus for stronger-than-expected economic growth.
  • Inflation tame: Inflation in the U.S. remains below the Fed’s 2% target and inflation expectations have been falling. Outside the U.S. we see more deflationary pressures.
  • U.S. companies remain in solid shape: U.S. companies have solid balance sheets that are flush with cash. Earnings growth has been solid 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. Government spending will shift to a contributor to GDP growth in 2015 after years of fiscal drag.
  • Lower energy prices help consumer: Lower energy prices should benefit the consumer who will now have more disposable income.

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

  • Timing/impact 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, which should provide the Fed more runway.
  • Slower global growth; deflationary pressures: While growth in the U.S. has picked up, growth outside the U.S. is decidedly weaker. The Eurozone is flirting with recession and Japan is struggling to create real growth, while both are also facing deflationary pressures. Growth in emerging economies has slowed as well.
  • Geopolitical risks: The geopolitical impact of the significant drop in oil prices, as well as issues in Greece, the Middle East and Russia, could cause short-term volatility.
  • Significantly lower oil prices destabilizes global economy: While lower oil prices benefit consumers, significantly lower oil prices for a meaningful period of time are not only negative for the earnings of energy companies, but could put pressure on oil dependent countries, as well as impact the shale revolution in the U.S.

While valuations are close to long-term averages, the trend is still positive, investor sentiment is neutral, and the macro backdrop leans favorable, so we remain positive on equities. However, as we have lost the liquidity provided by the Fed, we expect higher levels of volatility in 2015. 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; overweight vs. Intl
Intl Equity + Country specific
Fixed Income +/- HY favorable after ST dislocation
Absolute Return + Benefit from higher volatility
Real Assets +/- Oil stabilizes in 2H15
Private Equity + Later in cycle

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. Past performance is not a guarantee of similar future results. An investor cannot invest directly in an index.

Investment Insights Podcast – December 22, 2014

Bill MillerBill Miller, Chief Investment Officer

On this week’s podcast (recorded December 18, 2014):

What we like: Lower oil (gas) prices; giant tax break for U.S.; research says there could be a net of around $100B more in consumer spending

What we don’t like: U.S. Energy Renaissance may start to slow; less drilling in shale regions next year; risk of sovereign default (Venezuela); likely recession to hit Russia

What we’re doing about it: Tilt towards the beneficiaries of the energy complex (hotels, airlines, etc.)

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

Eurozone Crisis Report Card

Ryan DresselRyan Dressel, Investment Analyst, Brinker Capital

In January 2013 Amy Magnotta wrote in detail about how the actions of the European Central Bank (ECB) finally gave the markets confidence that policy makers could get their sovereign debt problems under control.[1] The purpose of this blog is to measure the progress of the ECB’s actions, as well as other critical steps taken to resolve the Eurozone crisis.

Maintaining the Euro: A+
The markets put a lot of faith in the comments made by the head of the ECB Mario Draghi in July, 2012. Draghi stated that he would “Pledge to do whatever it takes to preserve the euro.” These words have proven to be monumental in preserving the euro as a currency. Following his announcement, the ECB still had to put together a plan that would be approved by the ECB’s governing council (comprised of banking representatives from each of the 18 EU countries)[2]. The politics of the approval essentially boiled down to whether or not each council member supported the euro as a currency. Draghi’s plan ultimately passed when Germany’s Chancellor, Angela Merkel, endorsed it in September 2012.[3] The stabilization of the euro boosted lending and borrowing for European banks, and allowed governments to introduce necessary economic reforms outlined in the plan.

Since the plan was approved, the euro’s value versus the U.S. Dollar has continued to rise; reaching levels last seen in 2011. There is still some debate as to whether or not the currency will last over the long term, but for now its stability has helped avoid the worst possible outcome (financial collapse). There are several key elections coming up over the next month, which could renew the threat of breaking up the currency if anti-EU officials are elected.

Government Deficit Levels: B
The average Eurozone government deficit came in at 3.0% in 2013, which was down from 3.7% in 2012. Budgets will need to remain tight for years to come.

Corporate Earnings: B
The MSCI Europe All Cap Index has returned 27.46% in 2013 and 5.01% so far in 2014 (as of last week). The Euro area also recorded first quarter 2014 GDP growth at +0.2% (-1.2% in Q1 2013).[4] This indicates that companies in Europe have established some positive earnings growth since the peak of the crisis. On a global scale, Europe looks like an attractive market for growth.


Unemployment: C
Unemployment in the Eurozone has stabilized, but has not improved significantly enough to overcome its structural problems. The best improvements have come out of Spain, Ireland and Portugal due to a variety of reasons. In Ireland, emigration has helped reduce jobless claims while a majority of economic sectors increased employment growth. In Spain, the increased competitiveness in the manufacturing sector has been a large contributor. Portugal has seen a broad reduction in unemployment stemming from the strict labor reforms mandated by the ECB in exchange for bailout packages. These reforms are increasing worker hours, cutting overtime payments, reducing holidays, and giving companies the ability to replace poorly performing employees.[5]


There are also some important fundamental factors detracting from the overall labor market recovery. The large divide between temporary workers and permanent workers in many Eurozone countries has made labor markets especially difficult to reform. This is likely due to a mismatch of skills between employers and workers. High employment taxes and conservative decision-making by local governments and corporations have also created challenges for the recovery.

Additional Reading: Euro Area Labor Markets

Debt Levels: D
Total accumulated public debt in the Eurozone has actually gotten worse since the ECB’s plan was introduced. In 2013 it was 92.6% of gross domestic product, up from 90.7% in 2012. The stated European Union limit is 60%, which reflects the extremely high amount of government borrowing required to stabilize their economies.

Overall Recovery Progress: B-
On a positive note, governments are finally able to participate in bond markets without the fear of bankruptcy looming. Banks are lending again. Unemployment appears to have peaked and political officials recognize the importance of improving economic progress.

Unlike the 2008 U.S. recovery however, progress is noticeably slower. The social unrest, slow decision making, low confidence levels, and now geopolitical risks in Ukraine have hampered the recovery. When you consider the financial state of Europe less than two years ago, you have to give the ECB, and Europe in general, some credit. Things are slowly heading in the right direction.

The views expressed are those of Brinker Capital and are for informational purposes only. Holdings are subject to change.

[1] January 4, 2013. “Is Europe on the Mend?”
European Central Bank.
[3] September 6, 2012. “Technical features of Outright Monetary Transactions. European Central Bank.”
[4] Eurostat
[5] August 6, 2012. “Portugal Enforces Labour Reforms but More Demanded.”
[6] Eurostat (provided by Google Public Data)

Demographic Changes Looming (Part One)

10.17.13_BlogRyan Dressel, Investment Analyst, Brinker Capital

This is part one in a two-part blog series.

In 2013, it seems the financial headlines have been dominated lately by policy changes of the Federal Reserve, dysfunction in Washington, China’s threat of a hard economic landing, or Europe’s ongoing sovereign debt crisis.  Lost in these headlines are some major demographic trends that are already under way, or are looming on the horizon over the next decade.  Many of these changes will have a profound impact on investors, governments and societies in the United States and abroad.

Aging Population

The world’s developed countries are aging quite quickly.  As of the most recent 2010 census, the median age in the U.S. is 37.1, compared to 28.2 in 1970.  This is actually fairly low in comparison to some of the world’s other developed nations.


This is not a huge surprise as the baby boomer generation is reaching middle age.  It does, however, have some large implications that need to be watched closely by investors, companies and governments over the next decade.

What implications does this trend have for the U.S. and abroad?  For starters, an aging population will put a large strain on healthcare costs as the number of people who need access Medicare increases.  A study by Health Affairs cites aging population as a main driver of rising health care cost forecasts.  It projects national health care spending to grow at an average annual rate of 5.8% over the 2012 – 2022 period (currently near 4% in 2013).  By 2022 health care spending financed by federal, state, and local governments is projected to account for 49% of total national health expenditures and to reach a total of $2.4 trillion.[1]

Second, smaller subsequent generations (Gen X, Gen Y) will have to increase productivity to maintain the current low, single-digit GDP growth in the United States.  The responsibilities of the baby boomer generation upon retirement will naturally have to be absorbed by younger generations.  A 2013 study released by the Georgetown Center on Education and the Workforce (CEW) indicates that this trend is already occurring. It cites that there are more job openings created as a result of retirements today than in the 1990s.[2] The U.S. can fuel this productivity by increasing competitiveness in manufacturing, and using competitive advantages such as low energy costs and technological advancements.

Third, an increased focus will be put on fixed income and absolute return investment strategies, especially if the U.S is entering a rising interest-rate environment as many economists believe.  As populations age, their risk tolerance will naturally decrease as people need to plan for their years in retirement.  In 2012, only 7% of households aged 65 or older were willing to take above-average or substantial investment risk, compared to 25% of households in which the household head was between 35-49 years old.  Despite a growing life expectancy, the retirement age is still 65. This has major causes for concern for social security, capital gains tax policies, and corporate pension plans.  Subsequent generations will need to place an increased importance on individual retirement saving should the program terms change, or disappear altogether.

Part two of this blog will look at two additional trends of urbanization and wealth inequality.

[1] Health Affairs.  National Health Expenditure Projections, 2012 – 22: Slow Growth Until Coverage Expands and Economy Improves. September 18, 2013.

[2] Georgetown Center on Education and the Workforce. September 30, 2013.

Beginning of a ‘Great Rotation’?

Joe PreisserJoe Preisser, Brinker Capital

As the share prices of companies listed in the United States rose this week, to heights last seen in October of 2007, speculation has run rampant that a so called ‘Great Rotation’ from fixed income to equities may have commenced.

The continued easing of Europe’s sovereign debt crisis, combined with positive corporate earnings surprises and the temporary extension of our nation’s borrowing limit, has helped to quell a measure of the uncertainty that has plagued market participants during the course of the last few years. Tangible evidence of this phenomenon can be found in the marked decline of the Chicago Board Options Exchange Market Volatility Index (VIX), commonly referred to as the “fear gauge”, which is currently trading far below its historical average. The steep drop in expected market volatility suggests that investors believe to a large degree that many of the potential problems facing the global economy are already priced into current valuations, and as such have set expectations of the possibility of any external shocks to be quite low. This state of affairs has led directly to an increased appetite for risk within the market, which has culminated in strong inflows into equity funds. According to the Wall Street Journal, “For the week ended January 16, U.S. investors moved a net $3.8 billion into equity mutual funds. That followed the $7.5 billion inflows in the previous week, along with another $10.8 billion directed to exchange traded funds. Add it up and you’re looking at the biggest two-week inflow into stocks since April 2000” (January 24, 2013).

Although the movement of money into equities this year has been quite strong, whether or not this is the beginning of a significant reallocation from fixed income remains to be seen. Despite the flight of dollars into stocks, yields, which move inversely to price, on both U.S. Treasury and corporate debt have risen only moderately, and bond funds this year have not experienced the type of drawdowns that would be expected if investors were truly rotating from one asset class to another. In fact, what has transpired speaks to the contrary, as although inflows to the space have slowed from last year, they remain robust. According to an article in Barron’s published this week, “Bond funds, meanwhile, attracted $4.63 billion in net new cash. Bond mutual funds collected $4.21 billion of that sum, compared to the previous week’s inflows of $5.45 billion” (January 18, 2013). One possible explanation for the hesitation to exit the fixed income space is the lingering concern among investors over the looming fiscal fight in Washington D.C. and the potential damage to the global economy if common ground is not found. According to a recent Bloomberg News survey, “Global investors say the state of the U.S. government’s finances is the greatest risk to the world economy and almost half are curbing their investments in response to continuing budget battles” (January 22, 2013).

If begun in earnest, a rotation by investors from fixed income to equities would certainly present a powerful catalyst to carry share prices significantly higher; however caution is currently warranted in making such an assertion, as a potentially serious macro-economic risk continues inside the proverbial ‘beltway’. If the budget impasses in the United States is bridged in a responsible way, and the caustic partisanship currently gripping Washington broken, the full potential of the American economy may be realized and this reallocation truly undertaken. David Tepper, who runs the $15 billion dollar Apoloosa Management LP was quoted by Bloomberg News, “This country is on the verge of an explosion of greatness” (January 22, 2013).