Vlog – Quarter End Q&A: 3Q2018

Brinker Capital’s Global Investment Strategist, Tim Holland, 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. Can this record bull market continue to run?
  2. Will weakness in emerging market equities spark a bear market here at home?
  3. Will the Fed continue to raise rates and what might that mean for the economy?


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.

Is there any wisdom in the crowd?

Crosby_2015-150x150Dr. Daniel Crosby Executive Director, The Center for Outcomes & Founder, Nocturne Capital

“Anyone taken as an individual is tolerably sensible and reasonable – as a member of a crowd, he at once becomes a blockhead.” – Friedrich Von Schiller

I travel roughly once a week to conferences where, in addition to eating overcooked chicken, I am typically asked to speak to financial advisors about the foundations of behavioral finance. As anyone who travels for business well knows, it can be tricky in a new city to try and determine where best to eat, sleep, or watch a show. And while many nice hotels provide a concierge to guide you, the concierge’s advice is ultimately limited by the fact that it is just one person’s opinion. Having been steered amiss more than once by a concierge with a palate less sophisticated than my own (for surely it could not have been MY taste that was in question), I quickly learned to harness the power of the crowdsourced review. Apps like Yelp, Urban Spoon, and Rotten Tomatoes provide aggregated reviews that guide diners and moviegoers to restaurants and films that have received consensus acclaim.

While I may not always agree with the taste of any individual concierge or my local newspaper’s movie reviewer, I have never been disappointed with a movie or dish that has received widespread approval. In things that matter most (i.e., food and movies), there is wisdom in the crowd.

But the power of crowd thinking is not limited to picking out a tasty schnitzel or deciding whether to watch Dude, Where’s My Car? (18% on Rotten Tomatoes) – it is the bedrock upon which the most successful political systems are built. Sir Winston Churchill famously opined that, “The best argument against democracy is a five-minute conversation with the average voter,” a sentiment heard in many forms at election time. So why then has democracy proven to be so successful (or at least not entirely unsuccessful) over long periods of time? Why is it, paraphrasing Churchill again, “the worst form of Government except all those other forms that have been tried from time to time”? The answer is once again in the tendency of the crowd to be more wise, ethical, tolerant, and gracious than the sum of its parts. The alternatives, political systems like oligarchy and monarchy, live and die with the strengths or weaknesses of the few, which is a much higher risk/reward proposition than democracy. The average voter may be unimpressive, but the average of the averages tends to be the best game in town.

wisdom in the crowd2

If crowd wisdom can help us solve complex decisional problems and provides us with good-enough government, it seems intuitive that it has something to offer most investors, right? Wrong. Once again, the rules of Wall Street Bizarro World turn conventional logic on its head and require us to operate from a different set of assumptions.

Why is it then that a qualitative gap exists between investment and culinary decisions? Richard Thaler, behavioral economist par excellence, has identified four qualities that make appropriate decision-making difficult. They are:

  • We see the benefits now but the costs later
  • The decision is made infrequently
  • The feedback is not immediate
  • The language is not clear

Choosing a nice meal consists of clear language (“Our special tonight is deep-fried and smothered in cheese”), immediate feedback (“OMG! This is so good”), is made frequently (3 times daily, more if you’re like me), and has a mix of immediate and delayed costs (“That will be $27” or “I should have quit after three rolls”).

An investment decision, on the other hand, violates every single one of Thaler’s conditions. It consists of intentionally confusing language (What does “market neutral” even mean?), has a massively delayed feedback loop (decades if you’re smart), is made very infrequently (thanks for the inheritance, Aunt Mable), and has benefits that are delayed to the point that we can scarcely conceive of them (36-year-old me can scarcely conceive of the 80-year-old me that will spend this money). The crowd can provide us excellent advice on selecting a meal because it is a decision that is frequently made with results that are instantly known. Conversely, the wisdom or foolishness of a given investment decision may not be made manifest for years, meaning that the impatient crowd may have little wisdom to offer.

As we might expect from Professor Thaler’s research, the crowd gets it all wrong when deciding when to enter and exit the stock market. They enter at the time of immediate pleasure and long-term pain (bull markets) and leave at the time of immediate pain and long-term pleasure (bear markets). In A Wealth of Common Sense, Ben Carlson relates a study performed by the Federal Reserve that examined fund flows from 1984 to 2012. Unsurprisingly, “they found that most investors poured money into the markets after large gains and pulled money out after sustaining losses – a buy high, sell low debacle of a strategy.” Yet again we see that preferring the rules of every day to those of Wall Street Bizarro World means trading cheap emotional comfort for enduring poverty.

Jared Diamond’s book Collapse recounts the story of a people who tried to do what so many investors attempt in WSBW – inflexibly imposing their preferred way of life on an incompatible system. Diamond tells the story of the Norse, a once powerful group of people who left their homes in Norway and Iceland to settle in Greenland. The Vikings, who aren’t exactly known for their humility, doggedly pushed forward – razing forests, plowing land and building homes – activities that robbed cattle of grazable farmland and depleted the few extant natural resources. Worse still, the Norse ignored the wisdom of the indigenous Inuit people, scorning their ways as primitive compared to what they viewed as a more refined European approach to farming and construction. By ignoring the means by which the native people fed and clothed themselves, the Norse perished in a land of unrecognized plenty, victims of their own arrogance.

Like a Norseman in Greenland, you find yourself of necessity in a land with bizarre customs, some of which make little sense. This land is one in which less is more, the future is more predictable than the present and the wisdom of your peers must be roundly ignored. It is a lonely place that requires consistency, patience, and self-denial, none of which come easily to the human family. But it is a land you must tame if you are to live comfortably and compound your efforts. The laws of investing are few in number and easy enough to learn, but will initially feel uncomfortable in application. It won’t be easy but it is surely worth it – and it is all within your power.

The Center for Outcomes, powered by Brinker Capital, has prepared a system to help advisors employ the value of behavioral alpha across all aspects of their work – from business development to client service and retention. To learn more about The Center for Outcomes and Brinker Capital, call us at 800.333.4573.

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.


Fun Facts on The Election & The Stock Market…and Why None of Them Matter

Crosby_2015Dr. Daniel Crosby, Executive Director, The Center for Outcomes & Founder, Nocturne Capital

With less than one month remaining until the election, the already frenzied political coverage is sure to become even more fevered in the coming days. While each presidential election is unpredictable, it seems certain that this one is destined for the history books. For all of their sophistication, are there any political pundits that correctly predicted the rise of Bernie Sanders or that Donald Trump would emerge from a pack of 16 more politically experienced Republicans?

Adding to the confusion is that recent popular votes of all stripes—from Brexit to the Colombian peace deal—have not gone the way pollsters predicted. In the face of all of this uncertainty it is natural to wonder, “could the U.S. be the next surprise?” And a natural follow-on question is, “What does all of this mean for my money?” To begin to answer these questions, let’s look at some historical trends around U.S. elections and the stock market.

Incumbent vs. Challenger

Most considerations of political impact examine how potential candidates might influence the market, but let’s begin our study by flipping that on its head and ask, “How might the market help determine who wins the election?” As you might expect, incumbent parties are helped enormously by a rising market and challengers tend to be swept into power by a poor market.

washington_wallstreetSince 1928, 14 of the 22 presidential elections saw a rise in the broad market in the three months leading up to the big vote. In all but two of those instances, the incumbent party stayed in their comfy digs on Pennsylvania Avenue. But what of the eight instances where the market was down in the run up to the election? All but one of those more bearish periods saw the incumbent ousted from power.

This phenomenon was seen most recently in the failed reelection campaigns of George H.W. Bush (1992) and Jimmy Carter (1980). Bill Clinton, sensing the natural tendency of hard economic times to bring about change chided the senior Bush with his now famous “It’s the economy, stupid” line. The date to watch for this particular metric in this election cycle is August 1, at which time the S&P 500 closed at 2,170.84.

Democrats versus Republicans

Inasmuch as Republicans are broadly perceived as the more pro-business of the two parties, it may come as a surprise that the stock market has performed considerably better under Democratic than Republican presidents. In fact, since 1945 the average annual gain under a Democratic president is 9.7%, easily besting the average gain of 6.7% on the Republican’s watch.

But a closer look at the statistics tells a more nuanced story as, to borrow a Dickensian turn of phrase, Republicans have presided over both the best of times and the worst of times. The market’s most successful run occurred under Republican Gerald Ford—a whopping 18.6% annualized. However, the elephants also own the only two losing records in modern (post-1945) market history, with George W. Bush (-4.6% annualized) and Richard Nixon (-5.1% annualized) both overseeing periods of extended bearishness.

electionThe Election Cycle

Having now examined the market’s ability to predict the winner of the election and the impact of parties on performance, let’s look at the influence of the presidential cycle on market returns.

Since 1833, the market has typically produced the best returns in the year preceding an election, averaging 10.4% annualized. Election years themselves have tended to be good as well, with average returns at right around 6%. The worst years in the election cycle have been the first and second years of a president’s term, averaging 2.5% and 4.2% respectively. The conventional logic has been that familiarity breeds comfort and that the uncertainty surrounding the economic policies of a new leader have driven low returns early in the cycle.

Why None of This Matters

Having gone to some pain to research the relationship between the election and the market, let me now suggest that none of what you have read above matters. None of it. Our desire to look for signal in the unending noise surrounding political campaigns is a waste of time at best and can be dangerous to our financial well-being at worst. The government produces data on 45,000 pieces of economic each year and when they are laid on top of the mountain of data collected by political scientists, correlations emerge and most of them are spurious. To quote political pollster Nate Silver, “The temptation that some economists succumb to is to put all this data into a blender and claim that the resulting gruel is haute cuisine.” To make this point more concretely, consider some of the following:

  • Since 1928, election years like this one without an incumbent running for reelection have been some of the worst on record, clocking a -2.8% annualized return. Had you been aware of and acted on this information, you would missed the 5.37% gain for the large cap index year to date.
  • As discussed above, the market tends to gain 6% in election years. Great, but small comfort to those who lost 34% in 2008, an election year. It has been joked that a six-foot man can easily drown in a river that is three feet deep on average (since many parts of the river might be much deeper). The same can certainly be said of market returns where long-term averages tend to mask the more dramatic volatility underneath. The performance of the market is more attributable to economic conditions than superior policies. Democratic Presidents Roosevelt and Obama both inherited markets broken by the Great Depression and Great Recession respectively. While both deserve credit for guiding the nation during difficult times, they are also the beneficiaries of a tendency for stock prices to mean-revert and bounce back from dramatic lows. Bulls and bears may have less to do with donkeys and elephants than the statistics might suggest.
  • Finally, consider the research suggesting that the first year of a President’s term leads to the most paltry returns. Had you acted on this knowledge, you would have missed the 23.45% rise in the market in Obama’s first year in office and the double-digit advance in the first year of Bill Clinton’s presidency. By definition, averages are generalities that are not true of any specific situation and relying on them can cause deviation from an otherwise sound financial plan.

Election years introduce volatility and uncertainty into financial markets that leave investors and advisors alike searching for a calm port in a wild political storm. But in our efforts to make sense of the political and economic landscape, we run a real risk of finding connections where none exist. In 2016, one of America’s most powerful political dynasties was nearly upended by an independent and self-proclaimed democratic socialist. The Republican Party is now helmed by a reality television star who has never held office. The Cubs are in the playoffs.

At uncertain times like this, investors must return to what Jason Zweig refers to as “controlling the controllable.” The outcome of the election and the accompanying market reaction are very much unknowable. What remains very much in your control are your ability to diversify across multiple asset classes, maintain a long-term focus and work closely with a competent advisor to manage your own behavior. I don’t know who will win the White House and neither do you, but I know with some certainty that patient investors adhering to first principles will always come out ahead.







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 – Brazil: Does Instability Bring Hope?

Stuart Quint, Investment Insights PodcastStuart P. Quint, CFA, Senior Investment Manager & International Strategist

On this week’s podcast (recorded March 21, 2016), Stuart weighs in on all things Brazil especially on the current political climate and its economic impact.

Why talk about Brazil?

  • It’s the eighth largest economy in the world.
  • It’s the largest economy in Latin America.
  • For the last several years, it’s been a large drag on emerging market economic growth.

So, what’s been happening?

  • Brazilian markets shifted from a bear to a bull in March, as currency rebounded and markets followed.
  • There is increased hope for major political change as the current administration under President Dilma Rousseff faces potential impeachment.
  • Rousseff’s approval rating has plummeted (62% now disapprove) since her reelection in 2014 amid political scandal and economic stagnation.

Let’s talk about this scandal

  • In what has been labeled “Operation Car Wash”, the two-year investigation centers around corruption between oil giant Petrobras involving dozens of corporate executives and political figures.
  • Rousseff was head of Petrobras until 2010, prior to taking office.
  • Former Brazilian President Luiz Inácio Lula, who was to be Rousseff’s Chief of Staff, has been implicated on bribery charges.
  • Encouraged by massive protests, opposing politicians have called for a formal impeachment process to begin.

How does this begin to shape the Brazilian economy?

  • The prospect of a new start in Brazil bodes well for markets–Brazilian index has risen over 27% in 2016, currency has appreciated 10% in March alone.

That’s great, but there’s more to it

  • The path to impeachment is murky and should not be taken for granted.
  • Operation Car Wash has indicted politicians from both the current regime and the opposition.
  • Even with the possibility of a new government, political consensus on structural reform appears evasive for Brazil.
  • Pensions, infrastructure, and autonomy of the central bank are important to address in order to revive the Brazilian economy.

 Where does Brazil stand now?

  • Overall, the economy is in a difficult situation–GDP declined in 2015 and is set to decline again in 2016.
  • Inflation continues to rise and exceeds targets set by Central Bank.
  • Unemployment and bad credit also continue to rise.
  • Given that Brazil represents over half of the GDP and total population of Latin America, economic prospects are important for growth.

Please click here to listen to the full 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, a Registered Investment Advisor.

March 2016 Monthly Market And Economic Outlook

Amy MagnottaAmy Magnotta, CFASenior Investment Manager, Brinker Capital

February was a fragmented month. Equity markets were down mid- to high-single-digits for the first half of the month but rebounded off the February 11 bottom to end the month relatively flat. While fears of slower growth in U.S. and China as well as volatile oil prices continued to serve as negative catalysts to equity markets in the beginning of the month, positive reports of strong consumer spending and  employment as well as signs of stabilization in oil prices helped dissipate fears. In response, the market rallied during the second half of the month, finishing in neutral territory.

The S&P 500 Index ended slightly negative with a return of -0.1% for February. Sector performance was mixed with more defensive sectors – telecom, utilities and consumer staples – posting positive returns. Underperformance of health care and technology sectors caused growth to lag value for the month. Small caps continued to lag large caps, and micro caps had a particularly challenging month, underperforming all market caps.

International equity markets lagged U.S. markets in both local and in U.S. dollar terms for the month. Weak economic data coupled with concerns over the effectiveness of monetary policy response in both Europe and Japan caused investor confidence to drop, negatively impacting developed international markets. Emerging markets were relatively flat on the month, remaining ahead of developed international markets as these export heavy countries benefited from more stable currencies and an upturn in oil prices.

U.S. Treasury yields continued to fall in the beginning of the month, bottoming at 1.66%, before bouncing back to end the month at 1.74% as equities rebounded. The yield curve marginally flattened during the month. All investment grade sectors were positive for the month and municipal bonds also posted a small gain. High yield credit gained 0.6% as spreads contracted 113 basis points after reaching a high of 839 basis points on February 11th. We remain positive on this asset class due to the underlying fundamentals and attractive absolute yields.

We remain positive on risk assets over the intermediate-term as we believe we remain in a correction period rather than the start of a bear market. The worst equity market declines are typically associated with recessions, which are preceded by aggressive central bank tightening or accelerating inflation, factors we do not believe are present today. However, we acknowledge that we are in the later innings of the bull market that began in 2009 and the second half of the business cycle, and, while a recession is not our base case, the risks must not be ignored.

A number of factors we find supportive of the economy and markets over the near term.

  • Global monetary policy accommodation: Despite the Federal Reserve beginning to normalize monetary policy with a first rate hike in December, their approach should be patient and data dependent.  More signs point to the Fed delaying the next rate hike in March. The Bank of Japan and the ECB have been more aggressive with easing measures in an attempt to support their economies, and China is likely going to require additional support.
  • U.S. growth stable and inflation tame: U.S. economic growth has been modest but steady. GDP estimates are running at 2.2% for the first quarter (Source: Federal Reserve Bank of Atlanta). Payroll employment growth has been solid and the unemployment rate has fallen to 4.9%. Wage growth has been tepid at best despite the tightening labor market, and reported inflation measures and inflation expectations, while off the lows, remain below the Fed’s target.
  • Washington: The new budget fiscal policy is poised to become modestly accommodative, helping offset more restrictive monetary policy.vola

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

  • Policy mistake: The potential for a policy mistake by the Fed or another major central bank is a concern, and central bank communication will be key. In the U.S. 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, and a significant slowdown in China is a concern.
  • Wider credit spreads: While overall credit conditions are still accommodative, high yield credit spreads remain wide, and weakness is widespread.
  • Another downturn in commodity prices: Oil prices have rebounded off of the recent lows; however, another significant leg down in prices could become destabilizing.

On the balance, the technical backdrop of the market remains on the weaker side, but valuations are at more neutral levels. We expect a higher level of volatility as markets digest the Fed’s actions and assess the impact of slower global growth; however, our view on risk assets tilts positive over the near term. Higher volatility has led to attractive pockets of opportunity that as active managers we can take advantage of.

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. Brinker Capital Inc., a Registered Investment Advisor.

Investment Insights Podcast – Hope Springs Eternal

miller_podcast_graphicBill Miller, Chief Investment Officer

On this week’s podcast (recorded February 11, 2016), Bill addresses the current market climate and why there is reason to remain hopeful:

What we don’t like: Stocks are down around 10% in general; European stock markets are down even more; Asian markets down the most; it’s a tough environment for investors

What we like: We don’t believe this is a long-term bear market and don’t see a recession hitting the U.S.; labor and wages are positive; auto and housing is good as well; economy seems sturdy despite volatile market behavior; China poised to finalize five-year plan including lowering corporate tax rates and addressing government debt levels; ECB should start to show more support for its major banks

What we’re doing about it: Most of the damage is done; more sensible to see what we should buy or rotate into; hedged pretty fully in tactical products; staying the course in more strategic products

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.

Will The Santa Claus Rally Deliver in 2015?

HartChris Hart, Core Investment Manager

It is that time of year again. The time when Wall Street pundits begin to talk about the potential for the stock market to deliver its year-end present to investors, neatly wrapped in the form of positive gains to finish out the year, and even carry over into January. While seasonality is typically associated with the entire fourth quarter of a given year—as November and December tend to be stronger months for the S&P 500 Index—the “Santa Claus rally” is a more defined subset.

The Santa Claus rally concept was first popularized in 1972 by Yale Hirsch, the publisher of the Stock Trader’s Almanac, when he identified the positive trend between the last five trading days of the year and the first two trading days of the New Year. Over those seven trading days since 1969, the S&P 500 Index posted an average gain of 1.4%. However, investors have had to wait until the last week of the month to see if the actual Santa Claus rally occurs.

Over the years, analysts have speculated many possible explanations for the notion of a Santa Claus rally. One is that investors are simply more optimistic in the holiday season and market bears are on vacation. Others contend that consumers may be investing their holiday bonuses. A more technical explanations could be that year-end, tax-loss selling creates oversold conditions (i.e. buying opportunities) for value investors to buy stocks. Some propose the theory that portfolio managers may try to “window dress” their portfolios in an effort to squeeze out additional performance before year end. Regardless of the various possible explanations, market data supports the idea that since 1950, December has been the best month of the year for the S&P 500 Index.

Strategas: Historically the Best Month of the Year

Source: Strategas

That said, there are no guarantees on Wall Street and the delivery of a Santa Claus rally is no exception. In fact, the lack of a rally could be an important market signal. The Stock Trader’s Almanac warns, “If Santa Claus should fail to call; bears may come to Broad & Wall.” Interestingly, Jeffery Hirsch, son of Yale Hirsch and current editor of the Stock Trader’s Almanac, notes that over the past 21 years, the Santa Claus rally has failed to materialize only four times, and that preceded flat market performance in 1994 & 2005, and down markets in 2000 and 2008.

With so many macro forces at work here in the U.S. and globally, the presence of both headwinds and tailwinds in the current market allows room for debate as to whether or not the Santa Claus rally will occur 2015. The dollar remains strong, manufacturing is slowing, and energy remains under pressure due to low oil prices. However, valuations are not unreasonable, economic growth continues, albeit modestly, and we are seven years into a domestic bull market that continues to move higher amid shorter-term bouts of resistance and volatility. While some naysayers contend that the abnormally strong gains in October may have cannibalized some of December’s potential rally, I believe the Federal Reserve is one of the real wild cards here. If the Fed decides to raise interest rates in mid-December for the first time since 2008, higher levels of uncertainty could temper investor enthusiasm, depending on the Fed’s language regarding the duration and magnitude of any such action.

While I remain a believer in the magic of the holidays and am optimistic that the market can justify a Santa Claus rally in 2015, there are too many mixed signals across the markets to be certain. In the end, I just hope the Santa Rally of 2015 does not prove to be as elusive as that clever little Elf on the Shelf.

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: An Update on The Current Market Environment

Magnotta-Audio-150x126Amy Magnotta, CFASenior Investment Manager, Brinker Capital

On this week’s podcast (recorded September 2), Amy takes the mic to provide an update on the current market environment and how the recent volatility can create opportunity. Highlights include:

  • S&P 500 finished month down 6%; international markets in worse shape
  • 12% correction from high reached in May
  • Still viewing the environment as a correction, not start of a bear market
  • Bear markets typically caused by recessions and tend to be preceded by central bank tightening or accelerating inflation—these conditions aren’t being met yet
  • U.S. growth still positive
  • If Fed begins to tighten in September, the pace will be measured as inflation is still below target
  • Looking for opportunities created by market volatility

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.