Investment Insights Podcast – January 27, 2015

Bill MillerBill Miller, Chief Investment Officer

On this week’s podcast (recorded January 23, 2015):

What we like: ECB announces stimulative policies; developed markets (Spain, Italy, France, etc.) to benefit; hopeful for positive impact domestically

What we don’t like: U.S. economy slowing; investors nervous about current and future growth rate; some fallout from drop in oil prices

What we’re doing about it: Holding tight and looking for the benefits of the ECB stimulus and lower energy prices

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.

Investment Insights Podcast – December 22, 2014

Bill MillerBill Miller, Chief Investment Officer

On this week’s podcast (recorded December 18, 2014):

What we like: Lower oil (gas) prices; giant tax break for U.S.; research says there could be a net of around $100B more in consumer spending

What we don’t like: U.S. Energy Renaissance may start to slow; less drilling in shale regions next year; risk of sovereign default (Venezuela); likely recession to hit Russia

What we’re doing about it: Tilt towards the beneficiaries of the energy complex (hotels, airlines, etc.)

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

Monthly Market and Economic Outlook: December 2014

Amy MagnottaAmy Magnotta, CFASenior Investment Manager, Brinker Capital

Global equity markets were positive in November, helped by optimism over the prospect of additional monetary policy easing in Japan and Europe. U.S. equity markets posted another solid monthly gain, led by large and mid cap growth companies. The energy sector was down more than -8% due to the collapse in oil prices after OPEC decided not to cut output. However, the expectation of higher disposable incomes as a result of lower gasoline prices helped push the consumer sectors higher in November.

International equities lagged U.S. equity markets again in November. The S&P 500 Index has gained almost 14% year to date through November, while the MSCI All Country World ex USA Index is flat. The U.S. dollar, which has gained over 10% so far this year, has also been a contributor. Developed market equities fared better than emerging markets in November. European equities reacted positively to the expectation that the ECB would soon announce a full scale quantitative easing program. Within emerging markets, equity market gains in China and India were offset by weak performance in Brazil and Russia.

outlook_chartDespite stronger economic data, longer-term U.S. Treasury yields continue to move lower, while rates on the shorter end of the curve were unchanged to slightly higher, resulting in a flattening yield curve. From the beginning of November through December 12, the yield on the 10-year note fell 25 basis points to 2.10% and the yield on the 30-year bond fell 32 basis points to 2.75%. The yield on the 2-year note rose 6 basis points over that same period. The Barclays Aggregate Index was up +0.7% for the month, led by government bonds.

The negative sentiment surrounding the energy sector has weighed significantly on the high yield asset class. Energy represents 13% of the Barclays High Yield Index, up from 6% of the index in 2008. The credit issues outside of the energy sector have been limited, and should the economy continue to grow, current spread levels (525 basis points above Treasuries which we last saw in December 2012) look more attractive.

Our macro outlook has not changed. When weighing the positives and the risks, we continue to believe the balance is shifted even more in favor of the positives over the intermediate-term and the global macro backdrop is constructive for risk assets. As a result our strategic portfolios are positioned with an overweight to overall risk. A number of factors should support the economy and markets over the intermediate term.

  • Global monetary policy remains accommodative: Even with QE complete Fed policy is still accommodative. U.S. short-term interest rates should remain near-zero until mid-2015 if inflation remains contained. The ECB stands ready to take even more aggressive action to support the European economy, and the Bank of Japan expanded its already aggressive easing program.
  • Pickup in U.S. growth: Economic growth in the U.S. has picked up. Companies are starting to spend on hiring and capital expenditures. Both manufacturing and service PMIs remain in expansion territory. Housing has been weaker, but consumer and CEO confidence are elevated.
  • U.S. companies remain in solid shape: U.S. companies have solid balance sheets that are with cash. M&A deal activity has picked up this year. Earnings growth has been ahead of expectations 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. Fiscal drag will not have a major impact on growth this year, and the budget deficit has also declined significantly. Government spending will again become a contributor to GDP growth in 2015.

Risks facing the economy and markets remain, including:

  • Timing of Fed tightening: QE ended without a major impact, so concern has shifted to the timing of the Fed’s first interest rate hike. While economic growth has picked up and the labor market has shown steady improvement, inflation measures and inflation expectations remain contained.
  • Global growth: While growth in the U.S. has picked up more recently, growth outside the U.S. is decidedly weaker. Both the OECD and IMF have downgraded their forecasts for global growth.
  • Geopolitical risks: The geopolitical impact of the significant drop in oil prices, as well as issues in the Middle East and Ukraine, could cause short-term volatility.

Despite levels of investor sentiment that have moved back towards optimism territory and valuations that are close to long-term averages, we remain positive on equities for the reasons previously stated. In addition, seasonality and the election cycle are in our favor. The fourth quarter tends to be bullish for equities, as well as the 12-month period following mid-term elections.

outlook_12.18.174

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.

 

Divergence in Crude Oil Prices

Amy Magnotta, Brinker Capital

An interesting observation from 13D Research last week:

“U.S. gasoline prices appear to be more closely correlated with the global crude oil benchmark (Brent) than West Texas Intermediate (WTI). Consider the following: When WTI first crossed $92 per barrel in October 2007, the average gasoline price approximated $2.90 per gallon. Now, with WTI near the same $92 level as five years ago, the average gasoline price is 34% higher. Not surprisingly, Brent crude also gained 33% during that five-year span.”

The chart below shows how the prices of WTI and Brent crude oil have diverged since 2011: