After a strong surge in global financial markets in the first quarter of 2012, risk assets – equities, commodities, corporate credit – have sold off thus far in the second quarter. Uncertainties over global growth and Europe have reentered markets. At Brinker Capital, we are not surprised that some of the euphoria is being worked off. We would not be surprised to see further consolidation.
Several of our fundamental and technical indicators were showing signs of concern earlier this spring. At the end of the first quarter, the various Brinker discretionary portfolios reduced exposure to risk assets. Future signposts suggest the volatility could continue.
For those of you who follow our market outlook and quarterly portfolio calls, this might be familiar material. Some of the indicators we monitor were flashing warning signals:
- Event risk – European elections, particularly in France and Greece, along with stalling reform initiatives in Spain and Italy.
- Market fundamentals – economic indicators such as consumer and CEO confidence and economic surprises appeared to be peaking. The S&P 500 appeared to have discounted a lot of good news in valuations.
- Sentiment – though investors maintained bullish sentiment (low levels of short interest), corporate insiders were selling stock in 2012, a change from insider purchases seen last fall.
As a result, we reduced risk exposures across our various discretionary portfolios.
- Destinations and Personal Portfolios reduced exposure to risk assets and were positioned underweight risk compared to a neutral positioning.
- Crystal Strategy I reduced its portfolio beta from positive to now a modestly negative beta by reducing risk and adding inverse exposures designed to rise in falling markets.
We will continue to monitor the following signposts over the near term and actively manage our broadly diversified portfolios as appropriate.
- U.S. – Fed meetings later in June and prospects for further Quantitative Easing. Later this summer, we need progress on addressing the massive fiscal cliff to be reached early in 2013, regardless of the outcome in November elections.
- Europe – second round of Greek elections on June 17 and progress (or absence thereof) regarding further European integration (bank deposit guarantee, adding capital to weak banks, stabilization in bond yields).
- China – further, but moderate, monetary and fiscal stimulus, enough to avert a hard landing, but not enough to bail out weak global growth or produce sizzling China growth. The government is happy to see cooling in property markets.