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.

Monthly Market And Economic Outlook: September 2015

Amy MagnottaAmy Magnotta, CFASenior Investment Manager, Brinker Capital

Global growth concerns, specifically the impact of a slowdown in China, and the anticipation of Fed tightening beginning in the fall prompted a spike in volatility and a sell-off in risk assets in August. The decline occurred despite decent U.S. economic data. U.S. equity markets held up slightly better than the rest of the developed world while emerging markets fared worse. U.S. Treasury yields were unchanged on the month, but credit spreads widened in response to the risk-off environment. Crude oil prices hit another low in late August, also weighing on global equity and credit markets.

The S&P 500 Index ended the month down -6%, but experienced a peak to trough decline of -12%. Prior to that it had been more than 900 trading days since we last experienced a 10% correction. All sectors were negative on the month, with healthcare and consumer discretionary, which had been leading, experiencing the largest declines. Small caps experienced a -6% decline as well, while mid caps held up slightly better. Growth meaningfully lagged value in small caps, but style performance was less differentiated in the large cap space.

International developed equity markets lagged U.S. markets in August, despite a slightly weaker U.S. dollar. Japan edged out European markets. After leading through the first seven months of the year, international developed equity markets are now behind the S&P 500 U.S. equity markets year to date. Emerging market equities have experienced a steep decline, down more than -15% so far in the third quarter, amid the volatility in China and continued economic woes in Brazil and broad currency weakness.

August wasn’t a typical risk-off period as longer-term U.S. Treasury yields were unchanged on the month and yields on the short end of the curve rose slightly. The Barclays Aggregate Index declined -0.14% in August. Treasuries and mortgage-backed securities were flat for the month, but spread widening in both investment grade and high yield led to negative returns for corporate credit, with lower quality credits experiencing the largest declines. Municipal bonds were slightly ahead of taxable bonds in August and lead year to date.

Our outlook remains biased in favor of the positives, but recognizing 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.
  • 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 243,000 jobs during the past year. While wages are showing beginning signs of acceleration, 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 sectors.
  • Less uncertainty in Washington: After serving as a major uncertainty over the last few years, Washington has done little damage so far this year; however, Congress will still need to address the debt ceiling before the fall.

However, risks facing the economy and markets remain:

  • Fed tightening: 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, which could lead to increased market 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.
  • Geopolitical risks could cause short-term volatility.

While the recent equity market drop is cause for concern, 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 preceded by substantial central bank tightening or accelerating inflation. As described above, we don’t see these conditions being met yet today. 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 in September, 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 25 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.

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.

 

Investment Insights Podcast – August 26, 2015

miller_podcast_graphicBill Miller, Chief Investment Officer

On this week’s podcast, Bill explains why investors should focus on growth and not Fed policy during this volatile time in the market (recorded August 25, 2015):

Highlights include:

  • Economists have echoed our thought that investors should focus on growth and not so much on Fed policy.
  • We’re seeing a shift from a policy-driven market to a more fundamental-driven market.
  • While the ECB and Bank of Japan stimulate their economies with policy, we must wait to see if that will support markets the way it supported markets in the U.S.
  • Appears consensus view is that markets are close to a bottom, but there is a large range between high expectation and bottom.
  • Potentially a lot of upside or a lot of downside, so patience is key as we head into the fourth quarter.

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.

International Insights Podcast – Greek Tragedy Revisited After the Referendum

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

This audio podcast was recorded July 6, 2015:

Stuart’s podcast provides an update on Greece following this weekend’s referendum vote.

Highlights of the discussion include:

  • Greece itself is a known issue; however, secondary contagion impacts are not known
  • More caution on Europe; potential fallout on other risk markets
  • Areas to watch: level of EUR, peripheral bond spreads and politics

Click here to listen to the full 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, a Registered Investment Advisor.

International Insights Podcast – Greece: How Bad Is It?

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

This audio podcast was recorded June 29, 2015:

Not surprisingly, Stuart’s podcast this week features the unnerving situation in Greece and the ripple effect it may have on a global scale.

Highlights of the discussion include:

In short…

  • The breakdown in negotiations between Greece and its creditors justifiably disappointed the markets.
  • Our sense is the end of the world has not come yet.
    • Primary links to Europe and world economy appear small and manageable.
    • Secondary links to Europe are murkier but not visible near term.
  • Watch economics and politics in peripheral Europe for further direction.

So, what about the near-term?

  • Do not underestimate Europe’s ability to prolong the agony (though it appears they are trying to force Greece’s hand even with the announced July 5 referendum).
  • Multiple scenarios could happen:
    • Best case is that Greece gets new government more willing to cut a deal
    • Worst case is Grexit and passive EU institutions

Does that mean it’s time to panic?

  • Primary links appear relatively minor and obvious
    • Most of Greece’s €340bn debt held by large government institutions (ECB, EU, IMF)
    • Direct trade links are small
    • Greek economy is small relative to Europe and the world
  • Secondary impacts less clear
    • Near-term hit to European confidence and economic growth
    • Medium-term credibility issue to the euro as a concept – in event of Grexit, should we worry about who is next?
      • Examples:
        • Italy – lower popular political support for euro (though ruling coalition supports Euro)
        • Spain – pending 4Q15 elections (one opposition party Podemos with minority of votes considers itself kindred to the ruling Greek Syriza party)
        • France – greater need for fiscal tightening, most popular anti-Euro populist party in LePen National Front

What to keep an eye on if things are getting worse or better

  • The euro
  • Peripheral bond spreads (Italy, Spain vs. Germany)
  • Greek referendum (Does it even happen? “Yes” a good result, but does it result in new negotiations and/or change of government?)
  • Popularity of other populist political parties in other parts of Europe (Spain, France, Italy)

Click here to listen to the full 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, a Registered Investment Advisor.

Monthly Market and Economic Outlook: June 2015

Amy MagnottaAmy Magnotta, CFASenior Investment Manager, Brinker Capital

Financial markets in May were mixed with modestly positive returns in U.S. equity markets (+1.3% for the S&P 500), modestly negative returns for international equity markets (-1.5% for the MSCI ACWI ex USA), and flat returns in U.S. fixed income markets (-0.2% for the Barclays Aggregate). U.S. economic data was on the weaker side, generally attributed to bad weather; however, the labor market continues to show improvement. The expectation is still for the Fed to commence rate hikes later this year.

In U.S. equity markets all sectors were positive for the month except for Energy and Telecom. The healthcare sector led with gains of more than 4%. Small caps led large caps for the month, and growth led value except in the mid cap segment.

International equity markets delivered a small gain in local terms, but the stronger dollar weighed on returns for U.S. investors. Japan gained more than 5% in local terms amid stronger economic data, while Europe gained less than 1% in local terms. Emerging market equities lagged developed markets in May, declining -4% in US dollar terms. China and Brazil were particularly weak performers. Despite weaker performance in May, both developed international and emerging markets lead U.S. equity markets so far this year by a sizeable margin.

The 10-year U.S. Treasury yield ended the month 10 basis points higher at a level of 2.13% and so far in June 10-year yields have backed up another 25 basis points (through June 5). However, because of the small coupon cushion in U.S. Treasuries today, only a small increase in yields can lead to a negative total return for investors. The credit sector was mixed in May, with investment grade experiencing declines and high yield delivering small gains. Municipal bonds continued to underperform taxable bonds. Year to date high yield leads all fixed income sectors.

Our outlook remains biased in favor of the positives, but recognizing risks remain. We have entered the second half of the business cycle, but remain optimistic regarding the global macro backdrop and risk assets over the intermediate-term. As a result our strategic portfolios are positioned with a modest overweight to overall risk. 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, the ECB and the Bank of Japan have both executed bold easing measures in an attempt to support their economies.
  • U.S. growth stable and inflation tame: Despite a soft patch in the first quarter, U.S. economic growth is expected to turn positive in the second quarter and the labor market has markedly improved. Reported inflation measures and inflation expectations remain below the Fed’s target.
  • U.S. companies remain in solid shape: U.S. companies are beginning to put cash to work through capex, hiring and M&A. Earnings growth outside of the energy sector is positive, and margins have been resilient.
  • Less uncertainty in Washington: After serving as a major uncertainty over the last few years, Washington has done little damage so far this year; however, Congress will still need to address the debt ceiling before the fall. Government spending has shifted to a contributor to GDP growth in 2015 after years of fiscal drag.

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

  • Timing/impact of Fed tightening: The Fed has set the stage to commence rate hikes later this year. Both the timing of the first rate increase, and the subsequent path of rates is uncertain, which could lead to increased market 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. Growth in emerging economies has slowed as well.
  • Geopolitical risks: Could cause short-term volatility.

Despite higher than average valuations and neutral investor sentiment, the trend is still positive and the macro backdrop leans favorable, so we believe there is the potential for additional equity market gains. The quantitative easing programs of the European Central Bank and the Bank of Japan, combined with signs of economic improvement, have us more positive in the short-term regarding international developed equities, but we need to see follow-through with structural reforms. We expect U.S. interest rates to continue to normalize; however, U.S. Treasuries still offer relative value over sovereign bonds in other developed markets, which could keep a ceiling on long-term rates in the short-term.

As we operate without the liquidity provided by the Fed and move through the second half of the business cycle, we expect higher levels of both equity and bond market volatility. This volatility should lead to more attractive opportunities for active management across asset classes. Our portfolios are positioned to take advantage of continued strength in risk assets, and we continue to emphasize high conviction opportunities within asset classes, as well as strategies that can exploit market inefficiencies.

Asset Class Outlook Comments
U.S. Equity + Quality bias
Intl Equity + Neutral vs. U.S.
Fixed Income +/- High-yield favorable
Absolute Return + Benefit from higher volatility
Real Assets +/- Favor global natural resources
Private Equity + Later in cycle

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.

Monthly Market and Economic Outlook: May 2015

Amy MagnottaAmy Magnotta, CFASenior Investment Manager, Brinker Capital

In April we saw a reversal of some of what occurred in the first quarter. U.S. large cap equities were positive on the month (S&P 500 Index gained +1.0%); however, U.S. mid and small cap stocks experienced declines of -0.9% and -2.6% respectively. International developed equity markets continued to outperform U.S. markets (MSCI EAFE gained +4.2%), led by strong gains in Europe. The Euro strengthened 4.5% against the dollar during the month. Emerging markets led developed markets (MSCI EM gained +7.7%), helped by double-digit gains in China and Brazil. In the real assets space, crude oil soared +25% in April after an -11% decline in the first quarter, while REITs experienced modest declines.

Global sovereign yields moved higher in April. The yield on the 10-year Treasury climbed 11 basis points and as a result the Barclays Aggregate Index fell -0.4%. While investment-grade credit was negative on the month, high-yield credit gained +1.2% as spreads tightened. Municipal bonds underperformed taxable bonds during the month.

Our outlook remains biased in favor of the positives, but recognizing risks remain. We feel we have entered the second half of the business cycle, but remain optimistic regarding the global macro backdrop and risk assets over the intermediate-term. As a result, our strategic portfolios are positioned with a modest overweight to overall risk. 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, the ECB and the Bank of Japan have both executed bold easing measures in an attempt to support their economies.
  • U.S. growth stable and inflation tame: Despite a soft patch in the first quarter, U.S. economic growth remains solidly in positive territory and the labor market has markedly improved. Reported inflation measures and inflation expectations are moving higher but remain below the Fed’s target.
  • U.S. companies remain in solid shape: U.S. companies are beginning to put cash to work through capex, hiring and M&A. Earnings growth outside of the energy sector is positive, and margins have been resilient.
  • Less uncertainty in Washington: After serving as a major uncertainty over the last few years, Washington has done little damage so far this year; however, Congress will still need to address the debt ceiling before the fall. Government spending has shifted to a contributor to GDP growth in 2015 after years of fiscal drag.

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

  • Timing/impact of Fed tightening: The Fed has set the stage to commence rate hikes later this year. Both the timing of the first rate increase, and the subsequent path of rates is uncertain, which could lead to increased market volatility.
  • Slower global growth: While growth in the U.S. is solid, 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. Growth in emerging economies has slowed as well.
  • Geopolitical risks: Issues in the Middle East, Greece and Russia, could cause short-term volatility.

While valuations have moved above long-term averages and investor sentiment is neutral, the trend is still positive and the macro backdrop leans favorable, so we remain positive on equities. The ECB’s actions, combined with signs of economic improvement, have us more positive in the short-term regarding international developed equities, but we need to see follow-through with structural reforms. We expect U.S. interest rates to normalize, but remain range-bound and the yield curve to flatten. Fed policy will drive short-term rates higher, but long-term yields should be held down by demand for long duration safe assets and relative value versus other developed sovereign bonds.

As we operate without the liquidity provided by the Fed and move through the second half of the business cycle, we expect higher levels of market volatility. This volatility should lead to more opportunity for active management across asset classes. Our portfolios are positioned to take advantage of continued strength in risk assets, and we continue to emphasize high conviction opportunities within asset classes, as well as strategies that can exploit market inefficiencies.

Asset Class Outlook Comments
U.S. Equity + Quality bias
Intl Equity + Neutral vs. U.S.
Fixed Income +/- HY favorable after ST dislocation
Absolute Return + Benefit from higher volatility
Real Assets +/- Favor global natural resources
Private Equity + Later in cycle

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. Past performance is not a guarantee of similar future results. An investor cannot invest directly in an index.

Monthly Market and Economic Outlook: April 2015

Amy MagnottaAmy Magnotta, CFASenior Investment Manager, Brinker Capital

After 2014 was dominated by the strong performance of the narrow S&P 500 Index, the first quarter of 2015 showed better results for diversified portfolios and higher levels of volatility across and within asset classes—both positive developments for active management.

The focus remained on the Federal Reserve and the timing of the initial interest rate hike despite U.S. economic data coming in below expectations. The S&P 500 gained just 1% for the quarter, while mid caps and small caps fared better, gaining 4%. Growth outperformed value across all market caps, and high-dividend-paying stocks lagged amid concern of higher interest rates. The strong dollar also hurt U.S. multinationals as a high percentage of their profits are derived from overseas. Despite a strong February, commodity prices fell again in March and were the worst performing asset class for the quarter.

shutterstock_28211977While the anticipation of tighter monetary policy may have weighed on U.S. equity markets in the first quarter, looser monetary policy helped to boost asset prices in international developed markets. The MSCI EAFE Index surged 11% in local terms, but the stronger dollar dampened returns in U.S. dollar terms to 5%, still 400 basis points ahead of the S&P 500 Index. The euro fell -11% versus the dollar, the largest quarterly decline since its inception in 1999. Japan also benefited from central bank policy, gaining 10%.

Emerging market equities outpaced U.S. equities for the quarter, gaining 2.3%; however, dispersion was quite wide. All emerging regions delivered positive returns in local currency terms, although weaker currencies in Latin America had a significant impact for U.S. investors. For example, Brazil’s equity market gained 3% in local terms, but fell -15% in U.S. dollar terms. China and India posted solid gains of 5-6% for the quarter.

The 10-year U.S. Treasury yield bounced around in the first quarter, first declining 49 basis points in January, then climbing 56 basis points in February before declining again to end the first quarter at a level of 1.94%, 23 basis points lower than where it started. The Barclays Aggregate Index outperformed the S&P 500 Index for the quarter, with all sectors in positive territory. Credit spreads tightened modestly during the quarter and the high-yield sector outperformed investment grade. Municipal bonds were slightly behind taxable bonds as the market had to digest additional supply.

Our outlook remains biased in favor of the positives but recognizes that risks remain. We feel we have entered the second half of the business cycle and remain optimistic regarding the global macro backdrop and risk assets over the intermediate term. As a result, our strategic portfolios are positioned with a modest overweight to overall risk.

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, the ECB and the Bank of Japan have both executed bold easing measures in an attempt to support their economies.
  • U.S. growth stable: U.S. economic growth remains solidly in positive territory and the labor market has markedly improved.
  • Inflation tame: Reported inflation measures and inflation expectations in the U.S. remain below the Fed’s 2% target.
  • U.S. companies remain in solid shape: U.S. companies have solid balance sheets are beginning to put cash to work through capex, hiring and M&A. Earnings growth outside of the energy sector is decent, and margins have been resilient.
  • Less uncertainty in Washington: After serving as a major uncertainty over the last few years, Washington has done little damage so far this year; however, Congress will still need to address the debt ceiling before the fall. Government spending has shifted to a contributor to GDP growth in 2015 after years of fiscal drag.

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

  • Timing/impact of Fed tightening: The Fed has set the stage to commence rate hikes later this year. Both the timing of the initial rate increase and the subsequent path of rates is uncertain, which could lead to increased market volatility.
  • Slower global growth: While growth in the U.S. is solid, 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. Growth in emerging economies has slowed as well.
  • Geopolitical risks: Issues in the Middle East, Greece and Russia could cause short-term volatility.
  • Significantly lower oil prices destabilizes global economy: While lower oil prices benefit consumers, should oil prices re-test their recent lows and remain there for a significant period, it would be a negative not only for the earnings of energy companies but also for oil dependent emerging economies and the shale revolution in the U.S.

While valuations have moved above long-term averages and investor sentiment is neutral, the trend is still positive and the macro backdrop leans favorable, so we remain positive on equities. The ECB’s actions, combined with signs of economic improvement, have us more positive in the short term regarding international developed equities, but we need to see follow-through with structural reforms. We expect U.S. interest rates to normalize, but remain range-bound, and the yield curve to flatten. Fed policy will drive short-term rates higher, but long-term yields should be held down by demand for long duration safe assets and relative value versus other developed sovereign bonds.

As we operate without the liquidity provided by the Fed and move through the second half of the business cycle, we expect higher levels of market volatility. This volatility should lead to more opportunity for active management across asset classes. Our portfolios are positioned to take advantage of continued strength in risk assets, and we continue to emphasize high-conviction opportunities within asset classes, as well as strategies that can exploit market inefficiencies.

Asset Class Outlook Comments
U.S. Equity + Quality bias
Intl Equity + Neutral vs. U.S.
Fixed Income +/- HY favorable after ST dislocation
Absolute Return + Benefit from higher volatility
Real Assets +/- Oil stabilizes; interest rate sensitivity
Private Equity + Later in cycle

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. Past performance is not a guarantee of similar future results. An investor cannot invest directly in an index.

International Insights Podcast – Europe and Negative Interest Rates

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

This audio podcast was recorded March 19, 2015:

Stuart’s International Insights Podcast focuses on a new and growing phenomenon in European fixed income–negative interest rates

Highlights of the discussion include:

How did we get here?:

  • ECB QE drove bond values up and yields down
  • One out of every five euros of government debt trades with a negative interest rate (0 such securities existed in the summer of last year)
  • Non-ECB banks Switzerland and Sweden cutting interest rates to dissuade capital inflows in an effort to manage exchange rate
  • Asset managers and insurance companies trying to fund longer-term liabilities but they earn lower or negative spreads without price appreciation.

Potential implications:

  • Scenario 1: Little to no economic growth
    • Near-term, stimulative to European equities
    • Potentially helpful to the U.S. dollar, but less so for export earning of large U.S. companies
  • Scenario 2: Moderate to high economic growth
    • ECB potentially steps back to review QE perhaps pushing bond yields upward
    • Fixed income globally would be most at risk

Click here to listen to the full 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, a Registered Investment Advisor.

Investment Insights Podcast – March 12, 2015

Bill MillerBill Miller, Chief Investment Officer

On this week’s podcast (recorded March 9, 2015):

What we like: Global economic growth; Europe QE policy under way

What we don’t like: Valuations have moved higher; interest rates may be moving up; size of stock market compared to the economy at a high level

What we’re doing about it: Taking a little risk off the table; intermediate and long-term outlook is good for economy and stock markets; keeping an eye out for currency weakness in emerging markets

Click here to listen to the audio recording.

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