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 – Here Comes the Renminbi

miller_podcast_graphicBill Miller, Chief Investment Officer

On this week’s podcast (recorded November 20, 2015), we focus on the likelihood that the International Monetary Fund (IMF) will add the Renminbi (RMB) as an approved currency in its Special Drawing Rights (SDR) basket. Will this displace the U.S. dollar as the world’s reserve currency?

What we like: We don’t believe the RMB will supplant the dollar as the favored reserve currency, at least not anytime soon; law and precedent in our judicial system is more structured and supportive–not the case in China; debt markets aren’t well-developed in China; Chinese don’t necessarily want the RMB to be a much stronger currency relative to the U.S. dollar as it would impact their ability to export; approval would likely lead to more reform in China, which would add to global stability

What we don’t like: This won’t necessarily solve China’s current growth problems; would likely have some type of ripple effect (Australian dollar)

What we’re doing about it: Standing pat; announcement may come soon, but would not take shape for another year or so; no need to rush into portfolio changes; not a major concern to the U.S. dollar at this time

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: November 2015

Amy MagnottaAmy Magnotta, CFASenior Investment Manager, Brinker Capital

The market correction in the third quarter, prompted by the Federal Reserve’s decision to stay on hold and worries over China, resulted in investor sentiment reaching levels of extreme pessimism. Risk appetites returned in October and global equity markets rebounded sharply. The start to earnings season was also better than expected. With a gain of +8.4%, the S&P 500 Index posted its third-highest monthly return since 2010, bringing the index back into positive territory for the year. Fixed income markets were relatively flat, but high yield and emerging market debt experienced a rebound in the risk-on environment. Year to date through October, the S&P 500 Index leads both international equity and fixed income markets, a headwind for diversified portfolios.

Within the U.S. equity market sector leadership shifted again but all sectors were in positive territory. The energy and materials sectors, which have weighed significantly on index returns this year, both experienced double-digit gains for the month as crude oil prices stabilized. The more defensive consumer staples and utilities sectors underperformed. Large caps outpaced small and mid-caps, and the margin of outperformance for growth over value continued to widen.

International developed equity markets kept pace with U.S. equity markets in October despite a slight strengthening in the U.S. dollar. Performance in Japan and Europe was boosted on expectations of additional monetary easing. Emerging markets were only slightly behind developed markets, helped by supportive monetary and fiscal policies in China and stabilizing commodity prices. All regions were positive but performance was mixed, with Indonesia gaining more than +15% while India gained less than +2%.

U.S. Treasury yields moved slightly higher during October, and they have continued their move upward as we have entered November. Investment-grade fixed income was flat for the quarter and has provided modest gains so far this year. Municipal bonds outperformed taxable bonds. After peaking at a level of 650 basis points in the beginning of the month, the increase in risk appetite helped high yield spreads tighten more than 100 basis points and the asset class gained more than 2%. Spreads still remain wide relative to fundamentals.

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 patient 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, while muted, remains positive. Employment growth is solid as the unemployment rate fell to 5%. Wage growth has been tepid at best despite the tightening labor market, and reported inflation measures and inflation expectations remain below the Fed’s target.
  • U.S. companies remain in decent shape: M&A deal activity continues to pick up as companies seek growth. Earnings growth outside of the energy sector is positive, but margins, while resilient, have likely peaked for the cycle.
  • Washington: Policy uncertainty is low and all parties in Washington were able to agree on a budget deal and also raised the debt ceiling to reduce near-term uncertainty. With the new budget fiscal policy is poised to become modestly accommodative, helping offset more restrictive monetary policy.

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

  • Fed tightening: After delaying in September, expectations are for the Fed to raise the fed funds rate December. 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.
  • Geopolitical risks could cause short-term volatility.

While the equity market drop was concerning, we viewed 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 as the Fed begins tightening monetary policy later this year, the pace will be measured as inflation is still below target. While we expect a higher level of volatility as the market digests the Fed’s actions and we move through the second half of the business cycle, we remain positive on risk assets over the intermediate term. Increased volatility creates opportunities 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. Brinker Capital, Inc., a Registered Investment Advisor.

Investment Insights Podcast – November 13, 2015

miller_podcast_graphicBill Miller, Chief Investment Officer

On this week’s podcast (recorded November 10, 2015):

What we like & what we don’t like: In a relatively unexpected move, it is now likely that the Fed will raise interest rates in 2015; this has both positive and negative implications; employment is strong as well as wage growth; but repaying loans back to U.S. gets more difficult

What we’re doing about it: Monitoring Fed policy; taking a slightly more conservative posture in our conservative models; looking to protect against downside risk

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.

Has Quantitative Easing Worked? A Two-Part Blog Series Perspective (Part II)

Solomon-(2)Brad Solomon, Junior Investment Analyst

Part two in a two-part blog series discussing quantitative easing measures on a domestic and global scale. Part one published last week.

Transmission to Main Street has been dubious.

The Fed’s FRB/US model, which is the workhorse behind quantifying QE’s transmission mechanisms into the general economy, forecasted a 0.2 percentage-point drop in unemployment over a 2-year time horizon as a result of a $500 billion LSAP, according to then-Fed governor Stein in 2012. Given that the cumulative scale of QE in the U.S. totaled around $4 trillion over about 4.4 years, excluding intermittent periods between buying sprees, the FRB/US model would then forecast a reduction in unemployment of 1.6 percentage points. (This assumes that there are no marginally diminishing returns to QE dollars.) Building in a “lag” of six months, the actual U.S. unemployment rate fell by 4.0 percentage points during this period and currently hovers near 5%, right above what is often pegged as the natural rate of unemployment. To what extent that reduction is due to QE, though, is very difficult to answer—there is no “control subject” in real-world experiments. The next-best-option is the event study that looks at variables prior to and following some stimulus, although this risks blending the effect with some other variable. While unemployment has fallen near its natural rate, anecdotal evidence speaks to widespread underemployment

Other metrics look either ambiguous or decidedly impressive. Across the U.S., U.K., Eurozone, and Japan, industrial production growth has been significantly more volatile than it was pre-recession; unemployment has fallen, with exception of the Eurozone where it has marched further upward after a double-dip recession in 2013; household saving as a percent of disposable income has come down substantially. Lack of healthy inflation has proven to be the fly in the ointment. Nearly 30 countries have explicitly adopted inflation targeting (around half of those in the last 15 years), but the majority continue to be plagued by nagging disinflation or outright deflation. Consider the poster child Japan who pioneered QE over the 2001-2006 period in its commitment to purchase $3-6 trillion in Japanese government bonds (JGBs) per month until core CPI became “stably above zero.” While the Bank of Japan wrapped up with the program in March 2006 after witnessing year-over-year core CPI in Japan clock in just above zero for three consecutive months, this was more of a mathematical win. Headline inflation over the period picked up solely due to a rapid rise in the price of crude oil, which arguably has little connection to monetary policy. This is not to say that some commentators have not already called for an indefinite deflationary environment, or that QE’s effects on the money supply don’t appear ambiguous.

Getting back to using the U.S. as an example, income growth has not followed the drop in unemployment, and inequality has persisted. Annualized growth rates since 2010 have been near zero and well below their long-term averages, and the lack of growth is particularly pronounced in the lower income quintiles.

Solomon_QE_4

On another front, record-low mortgage rates are undoubtedly a product of QE but have not translated into pre-2008 home buying, even in the presence of rising FICO scores and real home prices that are hovering around their 10-year trailing average. In fairness to QE, though, there simply seems to be a lack of a relationship between the cost of borrowing money to buy a home, and the demand for borrowing that money, as evidenced by the chart below.

Solomon_QE_5

QE’s efficacy seems to have varied case-by-case, and there is a growing consensus that there are diminishing marginal returns to QE.

Of this last point, Japan and the ECB should take note. While the Bank of Japan refrained from expanding its QE program at its meeting this past Friday above the current $670 billion p.a. rate, such expansion remains on the table for its November and December meetings. A similar decision faces the ECB in December, and the rhetoric of ECB President Mario Draghi has been mostly dovish in tone. (The annual rate of asset purchases by the ECB currently stands at about $816 billion.) While both banks will ultimately adhere to their mandates in trying to combat deflation and negative export growth, perhaps expectations should be set low for how effective further QE will be in meeting those mandates.

Proponents of real business cycle theory would not be surprised at much of the above—that is, that aggressive monetary policy has failed to override a general shift in appetites for home-buying, tepid supply-glut disinflation, reduced appetite by banks to lend, and the preference by businesses towards doing nothing productive with bond issuance besides repurchasing their own equity. These “exogenous” factors may overpower the stimulatory nature of QE, or the problem may be one of model specification. (Getting back to the home sales/mortgage rate example, QE may do its job of lowering borrowing rates, but this may not ultimately stoke home-buying appetites, which is a failure of the assumed indirect transmission mechanism that underlies QE’s founding.) Whatever the case, while it has helped solve short-run liquidity problems by injecting cash into the financial system, QE has proven sub-optimal in terms of being a cure-all to the woe of general economic lethargy.

Further reading

  1. Fawley, Brett & Christopher Neely. “Four Stories of Quantitative Easing.” (2013)
  2. Krishnamurthy, Arvind & Annette Vissing-Jorgensen. “The Ins and Outs of LSAPs.” (2013)
  3. Klyuev, Vladimir et. al. “Unconventional Choices for Unconventional Times.” (2009)
  4. McTeer, Robert. “Why Quantitative Easing May Not Work the Same Way in Europe as in the U.S.” (2015)
  5. Raab, Carolin et. al. “Large-Scale Asset Purchases by Central Banks II: Empirical Evidence.” (2015)
  6. Schuman, Michael. “Does QE Work? Ask Japan.” (2010)
  7. Stein, Jeremy. “Evaluating Large-Scale Asset Purchases.” (2012)
  8. Williams, John. “Monetary Policy at the Zero Lower Bound.” (2014)
  9. Williamson, Stephen D. “Current Federal Reserve Policy Under the Lens of Economic History.” (2015)
  10. Yardeni, Edward & Mali Quintana. “Global Economic Briefing: Central Bank Balance Sheets.” (2015)

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 – November 6, 2015

miller_podcast_graphicBill Miller, Chief Investment Officer

On this week’s podcast (recorded November 5, 2015):

What we like: Clearer reasoning into why the economy was weak during summer months; inventories were too high, so businesses (smartly) quit building inventory allowing a drawdown; final demand for goods and services was positive; ultimately, slowdown seems temporary, lending itself to a positive outlook for fourth quarter; Central banks supporting economic growth via quantitative easing measures.

What we don’t like: Janet Yellen stated that she may in fact raise interest rates (by December); spooked the bond market as it seemed unlikely until 2016.

What we’re doing about it: Evaluating the soon-to-be-released employment report and its impact on Yellen’s potential decision.

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.

Investment Insights Podcast – October 27, 2015

miller_podcast_graphicBill Miller, Chief Investment Officer

On this week’s podcast (recorded October 27, 2015):

What we like: Tentative budget debt deal between Congress and President should fund government for next several months; better news and business activity out of China; U.S. consumer balance sheet good; wage growth positive; oil prices remain low

What we don’t like: Initial third quarter earnings just OK; some sales misses due to strong dollar and energy; manufacturing sector under great pressure

What we’re doing about it: Slow and steady wins the race; keeping an eye on any recession-related talk

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 – October 16, 2015

miller_podcast_graphicBill Miller, Chief Investment Officer

On this week’s podcast (recorded October 16, 2015):

What we like: Fed preaching lower interest rates for longer periods extends friendly monetary policy; Consumer sentiment higher than expected and may indicate potential higher sales and earnings for retailers during holiday season

What we don’t like: Sales growth generally weak; Walmart missed earnings; need growth for stocks to go higher

What we’re doing about it: Looking for positive signs of growth, perhaps that’s consumer sentiment

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.

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.

Investment Insights Podcast – September 25, 2015

miller_podcast_graphicBill Miller, Chief Investment Officer

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

What we like: Approaching the fourth quarter, coming out of a mid-cycle slowdown, should finally present greater opportunities of growth

What we don’t like: The lack of growth leading up to this point. Reports and surveys showing little to no growth recently; China’s growth slightly down; Europe’s growth minimal; U.S. growth similar to Europe, but at least positive

What we’re doing about it: Avoiding emerging markets that are decelerating; looking at developed markets where there are signs of positive growth

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.