The recession has been dodged (or ducked, or dipped, or dived, or dodged)

Holland_F_150x150Tim Holland, CFA, Senior Vice President, Global Investment Strategist

Recently, more than a few market prognosticators saw the US economy headed for a recession, a not unreasonable thought given weakened corporate and consumer sentiment, a very disappointing 20,000 jobs created in February, and increasingly flat US 2 Year / 10 Year Yield Curve and inverted US 3 Month / 10 Year Yield Curve, a harbinger of an economic downturn.

While cognizant of weakening economic data as we moved into 2019, Brinker Capital believed if we solved for monetary policy risk and trade policy risk both the economy and risk assets would be biased higher. Well, the Federal Reserve put its rate hiking and balance sheet unwinding plans on hold and the US/China trade discourse improved, with signs pointing toward an imminent agreement. And, as those meaningful economic and market headwinds abated, economic data improved and risk assets rallied. More specifically, the US added a better than expected 196,000 jobs in March, the US 2 Year – 10 Year Yield Curve steepened, the US 3 Month – 10 Year Yield Curve turned positive, albeit by only about 10 basis points, per the chart below, and the S&P 500 rallied 2%+ to start the second quarter, tacking on additional gains to a very strong Q1 2019. Outside the US, efforts by the Chinese government to stimulate its economy are bearing fruit, while the European Central Bank has assumed a more accommodative monetary policy stance.

Us Treasury

Today, we see little near-term risk of a US recession and our base case for the US economy remains growth of 2% to 2.5% in 2019.

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: FactSet

 

Vlog: Quarter-end Q&A 1Q2019

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:

  1. Have we seen the high in the stock market for the year?
  2. Is the yield curve indicating a recession is imminent?
  3. What is the market and economic impact of the Mueller Report?

Q&A_1Q19-thumbnail_Blog_v2

 

 

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.

Vlog – To Tell The Truth

Given the news flow and data points of late, Brinker Capital Global Investment Strategist, Tim Holland, CFA, poses the question to our $20 trillion economy, “Will the real US economy please stand up?” (recorded March 28, 2019).

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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.

It seems the jobs market has been drinking a bit of JOLT

Holland_F_150x150Tim Holland, CFA, Senior Vice President, Global Investment Strategist

With an attention-grabbing tagline, “All the sugar and twice the caffeine,” JOLT Cola burst onto the consumer product scene in the mid-1980s. Fortunately, or unfortunately depending on how one feels about highly caffeinated, sugary, carbonated beverages, JOLT Cola is no more. But, for we capital market types, there remains, another more important JOLT, and recently that JOLT has been packing more of a punch than JOLT Cola ever did.

Every month, the Bureau of Labor Statistics compiles the Jobs Openings and Labor Turnover Survey (i.e. JOLTS). The JOLTS program queries 16,000 private nonfarm businesses and government entities in the 50 states and the District of Columbia on timely employment topics, including job openings, hires, and layoffs. The data is compiled and analyzed to help us better understand the state of the labor market. And the survey result that commands the most media and investor attention is the jobs opening data that helps determine the spread between the number of Americans out of work and actively seeking a job and the number of available jobs. January of this year marked the 11th consecutive month where job openings outnumbered job seekers. More specifically, openings exceeded the number of Americans looking for work by more than 1 million. Today’s job market stands in sharp contrast to what the country experienced in 2009 when nearly 16 million Americans were seeking a job and companies and government entities had only two million positions to fill, see the chart below. Said plainly, there are more help wanted signs hanging in windows across this country than there are Americans looking for work. We are all likely living through the strongest jobs market in our respective lifetime.

US employment and job openings

All of this is very good news for the American worker. But, as we highlighted last week, a real risk for the markets and the economy is that a too tight jobs market sparks wage inflation and pulls the Federal Reserve, so recently moved to the sidelines, back into the game of raising rates.

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: FactSet

Welcome back, welcome back, welcome back!

Holland_F_150x150Tim 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.

fredgraph (1)

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

Holland_F_150x150Tim 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.

WW March 11 2019 The Bull's Birthday (002)

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: FactSet

Equity and fixed income return volatility

Williams 150x150Dan Williams, CFA, CFPInvestment 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%.

Equity fand fixed income return volatilityIt 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.

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.

 

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

Holland_F_150x150Tim 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.

CBOE Volatility Index

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.

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: FactSet

 

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

Holland_F_150x150Tim 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.

V bottom

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.

Barometer.2.26.19
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: FactSet

It was freezing in January, but the market was hot

Holland_F_150x150Tim 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.

Polar Vortex

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.

S&P 500 January
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.

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: FactSet