Monthly Market And Economic Outlook: October 2015

Amy MagnottaAmy Magnotta, CFASenior Investment Manager, Brinker Capital

A slowdown in China, which generated anxiety over the outlook for global growth, combined with the Federal Reserve’s decision to postpone the first interest rate hike, while warning of global developments, led to uncertainty and significant equity market volatility during the third quarter. The S&P 500 Index declined -12.4% from its May high through August 25 and ended the quarter with a -6.4% decline—the worst quarter since the third quarter of 2011. U.S. equity markets held up better than international equity markets, both developed and emerging. Longer-term Treasury yields declined during the quarter while credit spreads widened in response to the risk-off environment. Crude oil prices reached another low in late August, also weighing on global equity and credit markets.

Leadership within the U.S. equity market sector shifted in the third quarter. Utilities was the only sector to post a gain for the quarter. Healthcare gave back all of the gains it generated in the first half of the year, ending the quarter among the worst performing sectors with a decline of -10.7%. Energy and materials continued their declines, the former down more than -21% year to date. Large caps outpaced small and mid caps, but style performance was more mixed. Growth had a significant advantage within large caps; however, value led across small caps.

U.S. equity markets fared better than international developed equity markets in the third quarter, significantly narrowing the performance differential for the year-to-date period. The strength in the U.S. dollar moderated in the third quarter. Japan fell -14% in local currency terms on weaker-than-expected economic data, and the yen rebounded. The Europe ex-UK region was a relative outperformer, while commodity countries were relative underperformers. Emerging markets suffered steeper declines than developed markets. Fear of a hard landing in China and a weak economy and debt downgrade in Brazil weighed on the asset class.

High-quality fixed income held up well during the equity market volatility. The yield on the 10-year U.S. Treasury fell approximately 30 basis points to end the quarter at 2.06%. The Barclays Aggregate Index gained 1.2% for the quarter, with all sectors in positive territory. Municipal bonds also delivered a small gain. However, high-yield credit experienced significant spread-widening during the quarter, with the option-adjusted spread climbing more than 150 basis points to 630, and the index falling -4.8% in total return terms. While high-yield credit weakness is more pronounced in the energy sector, the softness has spread to the broader high-yield market.

Our outlook remains biased in favor of the positives, but recognizing that 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 cautious 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 rebounded in the second quarter and consensus expectations are for 2.5% growth moving forward. Employment growth is solid, with an average monthly gain of 229,000 jobs over the last 12 months. Wages have not yet shown signs of acceleration despite the tightening labor market, and reported inflation measures and inflation expectations remain below the Fed’s target.
  • U.S. companies remain in solid shape: M&A activity has picked up and companies also are putting cash to work through capex and hiring. Earnings growth outside of the energy sector is positive, and margins have been resilient. However, weakness due to low commodity prices could begin to spread to other sectors.

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

  • Fed tightening: After delaying in September, the Fed has set the stage to commence rate hikes in the coming months. Both the timing of the first rate increase, and 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.
  • Washington: Congress still needs to address a budget to avoid a government shutdown later this year, as well as an increase to the debt ceiling. While a deal on both is likely, brinkmanship could impact the markets short-term.
  • Geopolitical risks could cause short-term volatility.

While the recent drop in the equity market is concerning, we view 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 often preceded by substantial central bank tightening or accelerating inflation. As described above, we don’t see these conditions being met. 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 if the Fed begins tightening monetary policy later this year, the pace will be measured as inflation is still below target. However, we would not be surprised if market volatility remains elevated and we re-tested the August 25th low as history provides many examples of that occurrence. Good retests of the bottom tend to occur with less emotion and less volume as the weak buyers have already been washed out. Sentiment has moved into pessimism territory, which, as a contrarian indicator, is a positive for equity markets.

As a result of this view that we’re still in a correction period and not a bear market, we are seeking out opportunities created by the increased volatility. We expect volatility to remain elevated as investors position for an environment without Fed liquidity. However, such an environment creates greater dislocations across and within asset classes 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.

Central Bank’s Sway Stock, Market Commentary by Joe Preisser

Aided by a broad based reassessment of comments issued by European Central Bank President, Mario Draghi on Thursday, and the release of better than anticipated employment figures for the month of July in the United States, stocks rallied strongly on Friday to reverse the losses suffered earlier in the week and reclaim their upward trajectory.

Following a meeting of the American Central Bank’s policy making committee this week, the decision to forbear enacting any additionally accommodative monetary policy at present was announced in tandem with indications that measures designed to stimulate the world’s largest economy may be forthcoming.  The Federal Open Market Committee said in its official statement that they, “will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions.”  As the recovery in the world’s largest economy has continued at a frustratingly slow pace, hope has pervaded the marketplace that increased liquidity will be provided by policy makers in order to encourage growth should they deem it necessary.  In its most recent communiqué, the Federal Reserve has reinforced this belief thus offering support for risk based assets.  Brian Jacobsen, the Chief Portfolio Strategist for Wells Fargo Funds Management was quoted in the Wall Street Journal as saying, “They probably are closer to providing, as they say, ‘additional accommodation as needed’, but I still think that they want more data before they actually pull the trigger.”

Investors across the globe registered their disappointment on Thursday with the decision rendered by the European Central Bank, to refrain from immediately employing any additional measures to support the Eurozone’s economy, by selling shares of companies listed around the world.  Hope for the announcement of the commencement of an aggressive sovereign bond buying program, designed to lower borrowing costs for the heavily indebted members of the currency union, which blossomed in the wake of comments made by Central Bank President Mario Draghi last week were temporarily dashed during Thursday’s press conference.  Although Mr. Draghi pledged to defend the euro, and stated that the common currency is, “irreversible” (New York Times), the absence of a substantive plan to aid the ailing nations of the monetary union was disparaged by the marketplace and precipitated a steep decline in international indices.

Friday morning brought with it a large scale reinterpretation of the message conveyed by European Central Bank President, Mario Draghi the day before, as investors parsed the meaning of his words and concluded that the E.C.B. is in fact moving closer to employing the debt purchasing program the market has been clamoring for.  The release of better than expected news from the labor market in the United States combined with the improvement in sentiment on the Continent to send shares markedly higher across the globe.  According to the New York Times, “on Friday, stocks on Wall Street and in Europe advanced as investors digested the announcement alongside data showing the U.S. added 163,000 jobs.”  Although the absence of immediate action served to initially unnerve traders, further reflection upon the President’s comments revealed the resolve of the Central Bank to support the currency union and fostered optimism for its maintenance. A statement released by French bank Credit Agricole on Friday captured the marked change in market sentiment, “Mr. Draghi’s strong words should not be understated, in our view.  The ECB President made it perfectly clear that the governing council was ready to address rising sovereign yields…Overall, notwithstanding the lack of detail at this stage, we believe the ECB will deliver a bold policy response in due time”(Wall Street Journal).

Investment Commentary From Brinker’s Joe Preisser 6-11-12

As investors across the globe continued to grapple with the uncertainty on the European continent, the prospect of additional, accommodative monetary policies being enacted by several of the world’s major Central Banks sent share prices higher across indices this week.  In Europe, on Wednesday, stocks rallied to their best single day performance in more than seven months following a meeting of the European Central Bank(ECB).  Although the rate setting committee elected to maintain the current level, the President of the ECB, Mario Draghi signaled that measures designed to stimulate the euro-zone’s economy would be forthcoming if growth were to falter.  According to Bloomberg News, “Global stocks rallied the most this year, the euro strengthened and commodities jumped on speculation policy makers will take steps to revive the slowing economy.” Mr. Draghi’s sentiments were echoed on this side of the proverbial ‘pond’ by Federal Reserve Chairman Ben Bernanke in an appearance before a Congressional budget committee in which he reiterated that the Central Bank, “remains prepared to take action as needed to protect the U.S. financial system and economy” (New York Times).

Stocks rose across continent’s in the wake of an unexpected decision by the Central Bank of China on Thursday, to cut interest rates for the first time since 2008, in an attempt to stimulate growth in what has been a slowing economy.  According to the New York Times, “China cut its benchmark lending rate Thursday, for the first time in nearly four years, adding to efforts to reverse a sharp economic downturn.” The nation’s policy makers are once again demonstrating their continued resolve to act in an effort to thwart the negative effects of Europe’s sovereign debt crisis, which have rippled through the global economy. Dariusz Kowalczyk, an economist at Credit Agricole was quoted by the New York Times as saying, “The biggest impact of the move is likely to be on sentiment, both among businesses and consumers domestically by showing Beijing is bringing out the big guns to support growth…investors know that they have more ammunition if need be and a good track record in using it.”

Through the confusion the nations of the European Union face as a result of the precarious state of affairs in the nation of Greece, where the rapidly approaching national elections to be held on June 17th will serve as a referendum on the country’s membership in the euro zone, the Continent’s leaders have drawn closer to an accord on a rescue package for embattled Spanish financial institutions.  In an effort to halt the flight of capital still rattling the country and mitigate the dangers facing what is the fourth largest economy in Europe, the possibility that emergency funding could be made available to the banks themselves has come to the fore.   Throughout the current crisis Spain has strongly resisted attempts by its European partners to encourage the country to accept a rescue package, as the disbursement of these funds in the past has come laden with broad conditionality that has meant the need for additional austerity.  The most recent proposals, to lend directly to the troubled institutions themselves, have been designed with terms limited to the financial sector in an effort to make them more palatable to the government, thus displaying the resolve of Europe’s leaders to combat the current crisis and offering hope for a successful resolution.

There is a Name for it_#34timesaday

Your mobile device isn’t in its usual spot … your back pocket.  It’s not on the charger.  It’s not in your back pocket.  It’s not on the charger.  You check your pocket again.  Then you head to the car.  Then, back to the charger.

Sound familiar?

If you have trouble functioning without your mobile device, you are not alone.  In fact, you might be suffering from Nomophobia.

Nomophobia describes the anxiety many feel when they are without the use of their mobile phone.  The phrase was coined after the findings of a 2008 British study.  The researchers found that 53% of survey participants suffered anxiety that was on par with wedding day jitters and dental examinations, when they are without usage of their phones.

Fifty-five percent of those surveyed said the need for constant connectivity was driven mainly by a desire to keep in touch with friends and family.  Ten percent said that work demands required them to stay reachable at all times.  More than half of the nomophobes never turned off their phones.

This phenomenon has spread at an even pace with mobile adoption rates. SecurEnvoy’s more recent study found that the number of nomophobes has risen to 66%.

Interestingly, more women worry about loss of mobile connectivity than men – 70% of the women surveyed compared to 61% of the men.  However, the men were more likely to have more than one mobile device to maintain connectivity.

Not surprising, 18-24 year olds were the most nomophobia-prone.  This is not, however, an epidemic of the young.  People over the age of 55 were the third most nomophobic lot.

It’s debatable whether anxiety caused by mobile disruption rises to a phobic level.  Irrefutable is the extent with which mobile devices have changed our world and our experiences.

The 2008 study was sponsored by a UK Post Office who commissioned YouGov, a UK-based research organisation to look at anxieties suffered by mobile phone users. April 1, 2008