Welcome back, welcome back, welcome back!

Posted on March 19, 2019 by Brinker Capital

Tim Holland, CFA, Senior Vice President, Global Investment Strategist

A hallmark of the Great Recession was a decline in the prime age labor force participation rate from 83% to 80%, see the chart below. While a three-point drop might not seem significant, it reflects millions of Americans walking away from the economy, giving up on ever finding gainful employment. The economic and societal consequences of that dynamic were staggering.

Fortunately, over the past few years our long-lived economic expansion managed to produce both a level of demand for labor and gains in wages – north of 3% – significant enough to pull millions of Americans back into the workforce. Said differently, millions of Americans have been welcomed back to the economy, which is reflected in a rebound in the labor force participation rate to north of 82%. And while that is great and welcomed news for those Americans and their families, a tightening labor market and rising wages also pose risks to the markets and economy. To better appreciate this seemingly counterintuitive point, we have to remember that significant slack in the labor market post the Great Recession helped keep a lid on both interest rates and inflation, which was bullish for risk assets and supportive of economic growth. The risk now is that as the job market continues to tighten and wages continue to rise, the Federal Reserve will be forced to raise interest rates further, and in doing so will make the cost of capital too expensive, choking off corporate and consumer spending, ultimately putting the economy into a recession and stocks into a bear market.

While we do think inflationary and interest rate risk is underappreciated by many market participants, we also continue to see enough capacity in the labor market that wage inflation and broader inflation shouldn’t become a real risk to the economy and markets until sometime in 2020, at the earliest.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.

Chart source: US Bureau of Labor Statistics

It’s a big birthday for the bull market, and we see a successful quest for greater gains

Posted on March 14, 2019 by Brinker Capital

Tim Holland, CFA, Senior Vice President, Global Investment Strategist

Happy birthday bull market! The longest running bull market in United States history hit a major milestone last week, turning 10 on March 9. It sure has been an interesting and exciting 10 years.

US equities, as measured by the S&P 500 Index, found their footing on March 9, 2009 while the US and the world were in the throes of the Great Recession. Since then, the S&P 500 has produced a total return of approximately 396% and an average annualized return of approximately 17.3%. But, the ride higher hasn’t always been smooth. Consider, since March 2009 we’ve contended with four corrections of 13%+, US government shutdowns, a US debt downgrade, the European debt crisis, Brexit, the Arab Spring, the risk of an armed conflict on the Korean Peninsula, and a budding trade war with China. Yet even with all of that, the S&P 500 sits at 2743 – up from its open price of 675 on March 9, 2009 – and the US economy is growing 2.5%. Proof positive the economy tends to expand, and risk assets tend to increase in value. And, to that point, we think the market will remain on a successful quest for greater gains. After all, US equities are reasonably valued, earnings are growing, inflation is contained, monetary policy isn’t restrictive, and investment sentiment isn’t ebullient. We remain optimistic on US stocks into 2019, though we do expect a volatile trading environment.

Chart Source: FactSet

Equity and fixed income return volatility

Posted on March 7, 2019 by Brinker Capital

Dan Williams, CFA, CFP, Investment Analyst

People need no help picturing equity return volatility. Anyone invested in the equity market in the middle 2000s still likely feels the scars from the subprime mortgage crisis. Prior to that, there was the dot com burst of the early 2000s. The dark side of equity return volatility is double-digit loses in a short period of time that can take years to recover. It is for that reason equity investing is best for time horizons that are also double-digit in years. However fixed income volatility is more subtle in nature and although people know to try to avoid it, it is not as widely understood.

Volatility for investments is often represented by the standard deviation which most understand has to do with the range of returns that are experienced around the average return. However, knowing the term and understanding what the term represents are two separate matters. Volatility in traditional fixed income securities is driven by the two factors: changes in the rates that securities of similar risk should pay and how long you are locked into receiving the coupon rate of a given security. The magnitude these market rates changes impact the principal value of the fixed income instrument is driven by how long an investor is locked into a given rate as the duration of a bond. Accordingly, the fear of rising raters has driven investors to try to lower the duration of the bonds they own to lower the price hit or even to avoid fixed income securities.

One thing that differs between equity and fixed income volatility is what happens with returns after there is a downward movement in price. When an equity goes down in value it is likely due to the consensus judged future prospects of the equity having gone down. For a fixed income, as long as the future ability of the instrument has not come into serious question, the short-term hit comes due to the market view of rates required for payments having increased. In other words, equities go down because things have gotten worse while for fixed income prices go down because the market feels you should be paid a higher rate going forward.

As way of example, consider a diversified portfolio of bonds like that represented by a Bloomberg Barclays US Aggregate Bond replicating investment like the iShares US Aggregate Bond ETF (AGG) or the Vanguard Total Bond ETF (BND). Currently, the duration is about 6 and the 30-Day SEC Yield is about 3%. If rates rise by 0.5%, these securities will take about a 3% price hit (not precisely due to convexity but close enough). Going forward the SEC Yield should rise as bonds now are lower priced but pay the same coupon amount and new bonds are bought with higher coupons. The income return on a new dollar invested is now expected to be over 3% but a 3% hit was taken on the principal amount invested. Despite the feared rate hike occurring, the net return is still projected flat or maybe even slightly positive for the 12-month period.

Another way to picture this return volatility, we can look at the actual annualized 36-month, 84-month, and 120-month rolling periods for the Bloomberg Barclays US Aggregate and Russell 3000 Index since the start of 1994, 25 years ago. During this period there existed no 36 month period where Bloomberg Barclays US Aggregate failed to deliver a positive absolute return and as increasingly longer periods are looked at the range of actual outcomes settles into a 3% to 8% range. Alternatively, equity still possesses a few very unlucky 120-month (10-year) periods with a negative return as well as periods of annualized returns in excess of 14%.

It is for this reason that longer time horizons are prescribed for equity investing and time horizons of 3+ years are regarded as reasonable for holding a diversified fixed income exposure. Finally, it would not be an investment blog if it was not pointed out that these extreme return periods often occur at different times for different asset classes and intelligent diversification gives better return range confidence. Better investment return confidence leads to increased ability to plan and better planning usually leads to better outcomes.

Volatility vanishes (again), but it should be back (again)

Posted on March 5, 2019 by Brinker Capital

Tim Holland, CFA, Senior Vice President, Global Investment Strategist

More than once last summer, we were asked our thoughts on the early 2018 spike, and subsequent drop, in market volatility as measured by the VIX, Wall Street’s “Fear Index.” We noted we weren’t surprised by the return of volatility, an accelerating economy and rising rates were expected catalysts, nor its departure. We also believed volatility would be back, and back it was in the fourth quarter, before it vanished again. Given the rather volatile behavior of late – well, market volatility – we thought now was a good time to touch base on the topic.

To back up, in early 2018 the VIX spiked to 40 and the S&P 500 Index sold off sharply on a January jobs report that showed greater than expected wage inflation. While the economy and the market welcome modest inflation, an ever-present concern is accelerating inflation that forces the Federal Reserve (Fed) to raise interest rates aggressively, ultimately pushing the economy into a recession and stocks into a bear market. When there was little inflationary follow through post the January jobs report, and economic and earning reports continued to top expectations, volatility declined sharply and the market rallied strongly. That is until Q4 as investors grew concerned the Fed would raise rates and shrink its balance sheet more than economic and market conditions merited, and the US and China would enter a full blow trade war, the VIX spiked and stocks corrected. Then, as the Fed walked back its hawkish talk on rates and its balance sheet, and we received more good news than bad on the state of US/China trade negotiations and economic data came in largely as expected, the VIX peaked and the S&P 500 bottomed in late December. Since late December, the VIX has collapsed 23 points and the S&P 500 has rallied 19% – see the below chart for a look at volatility through 2018 and into 2019.

While we welcome the move higher in the S&P 500 and the decline in the VIX, we doubt we have seen the last of market volatility, with potential catalysts including better than expected economic growth and US/China trade relations. However, a bumpy market isn’t a bear market, and as long as fiscal policy and monetary policy remain accommodative, and inflation contained, US equities should be biased higher.

Chart source: FactSet

Giving advice that sticks

Posted on February 28, 2019 by Brinker Capital

Crosby_2015-150x150 Dr. Daniel Crosby, Chief Behavioral Officer

The numbers aren’t pretty. According to a 2016 study conducted by Northwestern Mutual, 62% of Americans do not have a financial advisor of any kind. And while not getting any advice is inadvisable, the numbers are bleak even within the cohort who are paying a professional, with only 40% of those individuals believing that their advisor exhibited long-term commitment and provided tailored attention.

But financial advisors aren’t alone in giving advice that is unequally distributed and unevenly executed. Study after study shows that less than half of Americans seek medical care for an illness, and among those that do visit a doctor, only about half of them take their medicine as directed. The result in both finance and medicine is disheartening: the vast strides we have made end up being truly taken advantage of by less than a quarter of the population. The concerned advisor naturally asks, “Is there more that we can be doing to more equitably distribute this life-changing knowledge?”

A 1970s study of physicians found only 25% of them acknowledged any culpability in patient non-compliance, an attitude that I believe to be widespread among financial advisors today. If we are to begin to address this problem, we must acknowledge as a profession that not all advice is created equal and begin to be students of advice that sticks. As Dr. Moira Somers says in her book, Advice That Sticks, most financial advisors provide good advice that is badly given.

Luckily, an organization no less impressive than the World Health Organization has provided five pillars of “stickiness” for us to consider when designing advice delivery systems for maximum uptake. To increase memorability, these five facets spell out the word FACTS (source: Advice that Sticks by Dr. Moira Somers):

Financial history – family money scripts, previous mistakes and successes with money, risk taking capacity, psychological comfort talking about money
Advice characteristics - easy or difficult to follow, complex or simple, immediate versus future sacrifices and payoffs
Client characteristics – readiness to change, ability to delay gratification, intellectual and emotional maturity
Team and advisor characteristics – support for change, level of (or lack of) warmth and acceptance, frequency of follow-up, processes to handle impasse
Social factors - default behaviors, level of social support, access to resources, family dynamics, social stigma involved with change

Understanding the five dimensions that good advice considers, I want to provide some practical next steps for those interested in giving stickier advice, many of which are drawn from Dr. Somers excellent book. As you review each of these five pillars, please review the provided checklist and give yourself and your organization a “stickiness score”, looking for ways in which you could improve the execution on your best advice.

Financial history

Do I know how this person’s family history impacts their ideas about money?
Am I familiar with their past patterns of financial behavior?
Have I appraised my client’s level of financial literacy?

Advice characteristics

Have I given simple advice that can be implemented with a single behavior?
Do I begin each meeting by asking the client about goal progress?
Have I asked the client which parts of the advice they might need the most support with?
Have I brainstormed with the client how to make the goal easier to achieve?
Have I asked the client to commit, out loud, to the desired course of action?

Client characteristics

Have I understood the needs of this client and provided bespoke advice?
Is this client ready to change or is change being foisted upon them?
Are we agreed on the course of action or do we need to discuss further to increase alignment?
Have I understood and tapped into their goals and purpose as a source of motivation?

Team and advisor characteristics

Are we treating client compliance with our advice as a shared responsibility?
Am I delivering advice in a way that is empathic and approachable?
Am I talking too much (or listening too little)?
Am I being judgmental?

Social factors

Have we identified supportive people in their life who can support this change?
Are there social sacrifices that will make this change difficult?
Is there more than one person at the advisor’s office who can be of service?
Can you provide a list of referrals to outside sources that could support the change?

The number of Americans seeking out formal financial advice has risen from just 25% a few years ago to nearly 40% today, and while that number is still far too low, substantial progress has been made. But in addition to increasing access to and awareness of financial advice more broadly, we must ensure that those already within our care are being well served. A great first step in that process is realizing that not all advice is created equal and that there is much that we can do to support those we are masking to make sometimes-dramatic shifts in the way that they move through the world.

Sources:

https://www.thinkadvisor.com/2016/06/21/most-americans-get-no-financial-advice-survey/?slreturn=20190028052749

https://www.amazon.com/Advice-That-Sticks-financial-advice-ebook/dp/B079DSVCJ9

Bell bottoms we can dig. But a V bottom we can REALLY dig.

Posted on February 26, 2019 by Brinker Capital

Tim Holland, CFA, Senior Vice President, Global Investment Strategist

We can’t comprehend why the ‘70s remain such a maligned decade. Sure, there was Watergate and Stagflation and a host of other national ills, but there was also disco, Welcome Back Kotter, and bell bottoms. And as we wait on the overdue return of bell bottoms to a position of fashion prominence, our attention turns to a more important, and potentially more timely, bottom – a V bottom in the stock market.

As discussed in prior blog posts, one prism through which investors can view both the market and capital allocation is technical analysis, which said simply, is the effort to ascertain future return patterns for risk assets based on prior return patterns. As such, technicians pay close attention to factors such as price momentum and moving averages, including whether the security or index of interest is trading above or below said average, which could be the point of price support or price resistance. Yes, technical analysis can be confusing!

So, when the S&P 500 Index sold off nearly 20% last year (see black line in chart below), many technicians predicted grim days ahead for the market as the benchmark for US equities was both trading meaningfully below its 50 day and 200 day moving averages (see green and red lines, respectively, below) and markets rarely experience a V bottom – a sharp correction followed by a short rebound.

In technical parlance, the market needed time to repair the damage done to it during the late 2018 pullback. Well, with the S&P 500 rallying 19% off its December low, we may just be in the midst of that often discussed, but seldom seen V bottom. And, while Brinker Capital does consider short-term technical factors such as momentum when making our asset allocation decisions, see the Brinker Capital Market Barometer below, we believe it is economic fundamentals, interest rates, and earnings that drive equities over the longer term, and on those fronts, we still see more good news than bad.

Chart source: FactSet

It was freezing in January, but the market was hot

Posted on February 12, 2019 by Brinker Capital

Tim Holland, CFA, Senior Vice President, Global Investment Strategist

To say it was cold in January might qualify as the understatement of the year, akin to something like the Patriots are a pretty good football team – full disclosure, I am NOT a Patriots fan. Indeed, January saw us all introduced to the dreaded Polar Vortex and minus 50-degree days in the upper Midwest.

But while we were all freezing, the US stock market was on fire with the Dow Jones Industrial Average, the S&P 500 Index, and the NASDAQ – and just about every other broad-based US equity benchmark – up meaningfully in January. In fact, the S&P 500’s 7.9% return in January marked the Index’s best January since 1987. A time in our recent past when the Patriots were definitely not dominating the NFL.

So, what’s behind the market’s great start to the year? And, what might it portend for the rest of 2019?

We don’t think it was one thing that put the market on firmer footing, but several factors including a more dovish Federal Reserve, a more constructive tone to US/China trade negotiations, a better than expected US jobs’ report for December, and a Q4 earnings season that has contained more good news than bad. Also, during the December market sell-off, investor sentiment went very negative and US equity-facing strategies experienced significant outflows, so the stage was set for a meaningful bounce if we got positive fundamental news, which we did. We continue to believe if we solve for monetary policy risk and trade policy risk, the US economy and market should both do well this year.

Which brings us to one of the great Wall Street adages, “As January goes, so goes the year,” which speaks to the idea that how the market does in January has often been indicative of how it does for the full year. In fact, since 1950 the full year performance of the S&P 500 has mirrored its January performance (for good or for ill) 58 out of 68 years or 85% of the time. Now, no one knows why this pattern persists, and it hasn’t always held – last year is an example of that- but let’s hope that for 2019, as January goes, so goes the year.

Chart source: FactSet

The Fed goes from stock market bad cop to stock market good cop

Posted on February 5, 2019 by Brinker Capital

Tim Holland, CFA, Senior Vice President, Global Investment Strategist

What a difference a month – give or take – can make. In December, the Federal Reserve (Fed) raised the Fed Funds rate 25 basis points (think of a basis point as cents are to a dollar) to a range of 2.25% to 2.50% and the market promptly sold off a lot, see the Financial Times image below.

While that rate increase was expected, it was the post-December Fed meeting press conference by Chairman Jay Powell that spooked investors as Powell indicated that the Fed was on a pre-determined path concerning interest rate increases and the ongoing shrinking of its balance sheet, regardless of market volatility and economic uncertainty. As an aside, the Fed’s balance sheet grew significantly during the Great Recession due to an undertaking known as Quantitative Easing/”QE,” where the Fed purchased trillions of dollars of bonds in the hope of stimulating the economy. Now that the economy is on much firmer footing, the Fed has been shrinking its balance sheet, an undertaking known as Quantitative Tightening/”QT.” Most economists believe QT will prove restrictive to economic growth.

Well, the Fed met again last week and is now singing a different tune. Specifically, the Fed is promising a much more patient, data dependent approach to both future interest rate increases and balance sheet management. The stock market clearly welcomed this gradualist approach, moving sharply higher on January 30, per the CNBC headline.

We have seen monetary policy risk – the danger of the Fed raising rates too far, too fast and sparks a recession – as one of two meaningful risks to the economy and markets this year. We now seem to be solving for monetary policy risk, and we do believe the Fed’s more patient, deliberate approach is appropriate. If we can solve for the other meaningful risk to the economy and markets, mainly US/China trade, we should see a boost to both consumer and corporate sentiment and spending. We do expect good news on the trade front soon, and we remain cautiously optimistic on the US economy and US equities into 2019.

Vlog – Quarter End Q&A: 4Q2018

Posted on January 16, 2019 by Brinker Capital

Brinker Capital Global Investment Strategist, Tim Holland, CFA, asks and answers those questions we think will be top of mind for clients as they open their quarterly statements and think back on the quarter that was:

Why did US equities correct so sharply in 4Q2018?
Why was the market so volatile in 4Q2018?
Is the bull market over?

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.

2018 wasn’t great, but don’t sing the blues – the world keeps getting better

Posted on January 8, 2019 by Brinker Capital

Tim Holland, CFA, Senior Vice President, Global Investment Strategist

Hard to believe, but the calendar has turned on another year. And for those of a certain age, it’s even harder to believe we are living in 2019; after all The Blues Brothers was released in 1980!

On top of the calendar shock, we have to contend with the fact that 2018 didn’t seem all that great. From an investing perspective, most asset classes were in the red, while the S&P 500 Index (S&P 500) was exceptionally volatile toward year-end and produced its worst total return in 10 years. And, from a political, societal, and cultural perspective, the US seemed more divided than ever.

As always, a bit of perspective is important. The S&P 500 was off less than 5% in 2018 on a total return basis and remains 16.5% higher over the past two years. Meanwhile, the US economy grew 3%+ in 2018 while our unemployment rate sits at just 3.9% and most measures of national wealth and health are at a record high. So, while we must periodically contend with market drawdowns and bouts of economic weakness, it’s important to remember that over time, most economies grow, risk assets increase in value, and the standard of living for all of us on this big blue marble improves.

To put that final point in sharper relief we have two interesting charts from Our World in Data. The first chart speaks to the dramatic increase in life expectancy since 1900, with Africa seeing a particularly significant jump from 50 years in 2000 to 60 years in 2017.

While the second chart, below, speaks to an almost unfathomable drop in global poverty, with less than 10% of the world’s population living in absolute poverty today compared with 44% in 1981.

The new year will likely present its share of challenges and setbacks, yet, if history is any guide, we will see economic growth and rising asset values and wealth created globally.