Battle of the market stars – Lou Ferrigno is earnings, ABC is stocks

Holland_F_150x150Tim Holland, CFA, Senior Vice President, Global Investment Strategist

Before there was reality TV there was, well, a lot of things including Battle of the Network Stars, which in a way was reality TV. Hosted by Howard Cosell and broadcast annually during the late ‘70s and early ‘80s, the show featured celebrities from the Big 3 networks – ABC, NBC, CBS – competing in a series of athletic events, sort of an Olympics for TV stars. It was spectacular.

We mention BOTNS as we are entering earnings season and earnings more than anything pull the market along – well earnings and interest rates, and rates are low and supportive of equity prices – and investors are worried as Wall Street is expecting Q1 2019 EPS for the S&P 500 Index to be down about 2%, the first year-on-year drop since 2016, per the chart below.

growth rate

Some fear we are facing a sustained drop in earnings and stock prices. We don’t think so, which brings us back to BOTNS and one of its most famous participants, the great Lou Ferrigno. An iconic moment in BOTNS is the 1979 Tug of War when Ferrigno, aka The Incredible Hulk from the CBS show of the same name, singlehandedly nearly pulls the ABC team into the pool separating the squads, helping win the event for his CBS team. Well, we see Lou Ferrigno as 2019 earnings and stocks as the ABC BOTNS team. Earnings might be flat to down slightly in Q1, but they should be up mid to high single digits for the year and will likely exceed estimates as the rebound in oil helps push energy company profits higher.

Growing earnings, muted interest rates, and contained inflation are all points of support for US stocks as we move through 2019 and should, in fits and starts, pull the market higher.

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.

Chart Source: FactSet

 

The Fed goes from stock market bad cop to stock market good cop

Holland_F_150x150Tim Holland, CFA, Senior Vice President, Global Investment Strategist

What a difference a month – give or take – can make. In December, the Federal Reserve (Fed) raised the Fed Funds rate 25 basis points (think of a basis point as cents are to a dollar) to a range of 2.25% to 2.50% and the market promptly sold off a lot, see the Financial Times image below.

Good Cop Bad Cop tweet

While that rate increase was expected, it was the post-December Fed meeting press conference by Chairman Jay Powell that spooked investors as Powell indicated that the Fed was on a pre-determined path concerning interest rate increases and the ongoing shrinking of its balance sheet, regardless of market volatility and economic uncertainty. As an aside, the Fed’s balance sheet grew significantly during the Great Recession due to an undertaking known as Quantitative Easing/”QE,” where the Fed purchased trillions of dollars of bonds in the hope of stimulating the economy. Now that the economy is on much firmer footing, the Fed has been shrinking its balance sheet, an undertaking known as Quantitative Tightening/”QT.” Most economists believe QT will prove restrictive to economic growth.

Well, the Fed met again last week and is now singing a different tune. Specifically, the Fed is promising a much more patient, data dependent approach to both future interest rate increases and balance sheet management. The stock market clearly welcomed this gradualist approach, moving sharply higher on January 30, per the CNBC headline.

Good Cop Bad Cop Article titleWe have seen monetary policy risk – the danger of the Fed raising rates too far, too fast and sparks a recession – as one of two meaningful risks to the economy and markets this year. We now seem to be solving for monetary policy risk, and we do believe the Fed’s more patient, deliberate approach is appropriate. If we can solve for the other meaningful risk to the economy and markets, mainly US/China trade, we should see a boost to both consumer and corporate sentiment and spending. We do expect good news on the trade front soon, and we remain cautiously optimistic on the US economy and US equities into 2019.

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.

 

Thoughts on the Federal Reserve Open Market Committee meeting and interest rates

Holland_F_150x150

 

Tim Holland, CFA,
Senior Vice President, Global Investment Strategist

 

  • As expected, the FOMC raised the Fed Funds rate to a target range of 2.25% to 2.50%.
  • The question for many is given markets had effectively “priced in” or were largely expecting the rate increase, why did equities sell off sharply and bonds rally strongly on yesterday’s Fed Funds news?
  • We – and many market participants – expected the Fed’s post meeting statement and Chairman’s Powell press conference to strike a much more dovish tone over the outlook for interest rate policy into 2019.  We think the Fed fell short on both fronts.
  • The Fed now expects two (instead of three) rate increases next year and also lowered their estimate for GDP growth in 2019 and their estimate of the long-term neutral interest rate (the Fed Funds rate that neither hinders nor helps economic growth).
  • However, we believe the Fed did not adequately recognize the impact recent market volatility, slowing economic growth outside the US and the ongoing US / China trade dust up is likely having on corporate sentiment and spending, and how a weakening of both could ultimately cause the US economy to stall and potentially slide into recession.
  • We see two primary risks for the markets and the economy into the new year – 1) a monetary policy mistake (the Fed going too far, too fast) and 2) a trade policy mistake (the US / China trade dynamic worsening).  After today, we have not yet “solved for” monetary policy risk, which means investors will likely be looking even more intently for good news on the trade front.  We are optimistic that it is coming. In the meantime, the risk posed by monetary policy to the economy and markets has increased.
  • Finally, the next Fed meeting isn’t until January.  We expect investor disappointment over today’s FOMC statement and Chairman Powell’s press conference to be additive to already heightened market volatility.  However, a bear market is not our base case.  There is still time for monetary policy and trade policy to move in a more supportive direction for both the economy and risk assets as we enter 2019. Meanwhile, indicators of an imminent bear market or recession aren’t present, and we can continue to cite several positive economic and market data points, including…
    • The yield curve has not inverted
    • Inflation remains contained (including wage inflation)
    • Corporations and consumers have ample access to credit
    • US fiscal policy remains accommodative
    • US corporate earnings should grow 20%+ this year and by mid to high single digits next year
    • Market valuation is attractive with the S&P 500 trading at about 15x forward earnings

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.

Investment Insights Podcast: Fiscal policy takes the baton from monetary policy – What it means for the economy & risk assets

Tim Holland, CFA, Senior Vice President, Global Investment Strategist

On this week’s podcast (recorded February 23, 2018), Tim takes a closer look at US fiscal policy and how it might impact the economy and markets as we move through 2018.

Quick hits:

  • For now, we see fiscal policy as a net positive for economic growth and risk assets, particularly equities.
  • We also don’t see interest rates and inflation as a risk to the economy and markets.
  • We do think rates are biased higher, which is one reason we are conservatively positioned within fixed income.
  • Increased investor concern over higher rates and inflation is driving greater market volatility, something we all lived through earlier this month.

For Tim’s full insights, click here to listen to the audio recording.

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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: Changing dynamics of the active and passive debate

Chris HartHart_Podcast_338x284Senior Vice President

On this week’s podcast (recorded July 21, 2017), Chris provides some of the more interesting data points and perspectives that help shed light on this potentially changing dynamic.

 

Quick hits:

  • Just as stocks, styles, strategies, sectors, and industries go in and out of favor, so too should performance of active and passive strategies.
  • Passive investing might be peaking and future market conditions suggest a more favorable environment for active management going forward.
  • The incredible growth in the number of ETFs has created a strong headwind for active managers.
  • Correlations between stocks have been stubbornly high while the percentage of active managers outperforming has been below 50% since 2010.
  • The potential for inflation makes it increasingly difficult for markets to rely on the generosity of central banks and continued efficacy of monetary policy.  .
  • At Brinker we believe that both active and passive strategies play an important role in portfolio construction and asset allocation.

For the rest of Chris’s insight, click here to listen to the audio recording.

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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.

The road to interest rate normalization in 2017

Holland 150 x 150Tim Holland, CFA, Senior Vice President, Global Investment Strategist

Since 1965, the Fed has implemented policy tightening 15 times and the impact on the bond market has not always translated into longer rates rising. For example, in 2004 the Fed began raising rates in response to concerns of a housing bubble. As a result, the bond market did well as the yield on the 10-year Treasury fell.

More recently, during the current market cycle, the Fed increased rates by 25 basis points in December 2015. The 10-year Treasury yield fell and the bond market generated a positive return while equities plummeted in the first quarter of 2016. A year later, the Fed increased rates by 25 basis points in December 2016. The impact on markets was minimal with both equities and fixed income generating strong positive returns in the two months that followed. Year to date, equities and bonds have rallied in the face of two rate increases by the Fed; first in March and then in June. We expect one more rate increase in 2017.

shutterstock_124163875 resizedCatalysts for higher interest rates

Many positive factors are currently present in the U.S. economy that justify and support a move toward interest rate normalization:

  • Stable U.S. economic growth. U.S. economic growth has been modest but steady. The new administration and an all-Republican government will try to stimulate the economy through reflationary policies including tax cuts, infrastructure spending and a more benign regulatory environment.
  • Supportive credit environment. High yield credit spreads have meaningfully contracted and are back to the tight levels we saw in 2014.
  • Inflation expectations. Historically, there has been a strong positive correlation between interest rates and inflation. Many of the anticipated policies of the Trump administration are inflationary. In addition, the Brinker Capital investment team believes the economy is in the second half of the business cycle, which is typically characterized by wage growth and increased capital expenditures—both of which eventually translate into higher prices. We expect inflation expectations to move higher.
  • Unemployment levels. The labor market has become stronger and is nearing full employment. Unemployment has dropped to a level last seen in 2001.

A rising rate environment should prove challenging for some areas of fixed income.  However, fixed income can serve as the ballast for a broadly diversified portfolio and a good counter to equity market volatility.  Our fixed income exposure is focused on strategies with below average duration and a yield cushion.

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.

Fed continues on road to interest rate normalization

lowmanLeigh Lowman, Investment Manager

In a widely anticipated move, the Fed increased interest rates by 25 basis points on March 15, 2017, the second interest rate hike in three months and there are talks of potentially two more raises this year. Positive economic data and a rise in business confidence served as a catalyst for the Fed to continue its interest rate normalization efforts with the possibility of as many as two additional rate increases later this year. However, recent rhetoric from the Fed reaffirmed their commitment to move at a cautious pace, supporting Brinker Capital’s view that the process of longer term rates will likely be prolonged and characterized in fits and starts, rather than linear, as the market adapts to the new normal.

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Source: FactSet, Federal Reserve, J.P. Morgan Asset Management. U.S. Data are as of February 28, 2017. Market expectations are the federal funds rates priced into the fed futures market as of the date of the December 2016 FOMC meeting. *Forecasts of 17 Federal Open Market Committee (FOMC) participants are median estimates. **Last futures market expectation is for November 2019 due to data availability.

Catalysts for higher interest rates

Many positive factors are currently present in the economy that point to a move toward interest rate normalization:

  • Stable U.S. economic growth. Economic growth in the U.S. has been modest but steady. The new administration and an all-Republican government will likely further stimulate the economy through reflationary fiscal policies including tax cuts, infrastructure spending and a more benign regulatory environment.
  • Supportive credit environment. High yield credit spreads have meaningfully contracted and are back to the tight levels we saw in 2014. Commodity prices have also stabilized.
  • Inflation expectations. Historically, there has been a strong positive correlation between interest rates and inflation. Many of the anticipated policies of the Trump administration are inherently inflationary. Inflation expectations have increased accordingly and headline inflation has been moving towards the Fed’s 2% long-run objective. In addition, we believe we are in the second half of the business cycle, typically characterized by wage growth and increased capital expenditures, both of which eventually translate into higher prices.
  • Unemployment levels. The labor market has become stronger and is nearing full employment. Unemployment has dropped to a level last seen in 2007.

Historical perspective

From 1965 to present, the Fed has implemented policy tightening a total of 15 times and the impact on the bond market has not always translated into longer rates rising. For example, back in 2004 the Fed began raising rates in response to beginning concerns of a housing bubble and the bond market did well as the yield on the 10-year Treasury fell.

More recently during the current market cycle, the Fed increased rates by 25 basis points in December 2015. The 10 year Treasury yield fell and the bond market generated a positive return while equities plummeted in the first quarter of 2016. A year later, the Fed increased rates by 25 basis points in December 2016. The impact on markets was minimal with both equities and fixed income generating strong positive returns in the two months that followed.

Fixed income allocation

Traditional fixed income has historically provided a hedge against equity market risk with substantially less drawdown than equities. Although a rising rate environment would suggest flat to negative returns for some areas of fixed income, the asset class still provides stability in portfolios when equities sell off. For example, fixed income provided an attractive safe haven during the market correction in the beginning of 2016.

In an environment of rising rates, Brinker Capital believes an allocation to traditional fixed income is still merited as we expect the asset class to provide a good counter to equity volatility.

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Source: Fact Set, Brinker Capital, Inc. Index returns are for illustrative purposes only. Investors cannot invest directly in an index. Past performance does not guarantee future results.

Overall, much uncertainty remains on the timing and trajectory of interest rate changes. Brinker Capital remains committed to helping investors navigate through a rising rate environment through building diversified portfolios across multiple asset classes.

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.

Investment Insights Podcast: What a difference Fed meeting can make

Chris HartHart_Podcast_338x284, Senior Vice President

On this week’s podcast (recorded March 17, 2017), Chris discusses how the recent Fed rate hike has impacted the markets.

 

shutterstock_9514525 (2)

Quick hits:

  • Markets moved higher across the board which was a reversal from the flat to down trend that was in place for the last few sessions.
  • Most institutional investors do not have expectations of recession over the near term.
  • The economy continues to strengthen and we believe the case remains to be constructive on risk assets over the intermediate term.
  • Rates are still low by historic standards and even with the increase, the road to interest rate normalization will be long.
  • We continue to believe that a modest overweight to risk is prudent over the intermediate term, and as a result are not planning material changes to portfolio positioning at this point in time.

For the rest of Chris’s insight, 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.

The road to interest rate normalization

lowmanLeigh Lowman, Investment Manager

“Lower for longer”; the motto heard repeatedly since the 2008 financial crisis may soon be irrelevant as interest rates have begun the much anticipated path of normalization. We believe interest rates are biased higher in the longer term as economic data leans positive, giving the green light for the Fed to resume its interest rate normalization efforts. As shown in the chart below, the recent December rate increase is likely the first in a series of hikes to occur over the next few years. However, the process of longer term rates moving higher will likely be prolonged and characterized in fits and starts, rather than linear, as the market adapts to the new normal.

rate_chart_1-5-17

Source: FactSet, Federal Reserve, J.P. Morgan Asset Management. U.S. data are as of November 30, 2016. Market expectations are the federal funds rates priced into the fed futures market as of the date of the September 2016 FOMC meeting. *Forecasts of 17 Federal Open Market Committee (FOMC) participants are median estimates. **Last futures market expectation is for August 2019 due to data availability.

Many positive factors are currently present in the economy that point to a move toward interest rate normalization, including:

Stable U.S. economic growth – U.S. economic growth has been modest but steady.  The onset of the Trump administration will likely further stimulate the economy through reflationary fiscal policies including tax cuts, infrastructure spending and a more benign regulatory environment.

Supportive credit environment – Since the February 11, 2016 market bottom, high yield credit spreads contracted 431 basis points with most sector credit spreads now at or near one year market lows. Commodity prices have also stabilized.

Inflation expectations – Historically there has been a strong positive correlation between interest rates and inflation. Many of the anticipated policies of the Trump administration are inherently inflationary, and inflation expectations have increased accordingly. In addition, we believe we are in the second half of the business cycle, typically characterized by wage growth and increased capital expenditures, both of which eventually translate into higher prices.

Unemployment levels – The labor market has become stronger and is nearing full employment. Unemployment has dropped to a level last seen in 2007.

What does this mean for fixed income?

While a rising rate environment may suggest flat to even negative returns for some areas of fixed income, it still provides stability in the portfolio when equities sell off.  Historically, fixed income has had substantially less drawdown than equities. For example shown in the charts below, in the two days following the Brexit decision on June 23, 2016, equities sold off over 4% and fixed income was up sharply. Likewise fixed income provided an attractive safe haven during the market correction in the beginning of 2016. In an environment of rising rates, we expect fixed income to provide a good counter to equity volatility.

rate_chart_2_1-5-17

Source: FactSet

Although uncertainty remains on the timing and trajectory of interest rates changes, we believe interest rates are poised higher for the longer term. Brinker Capital is committed to helping investors navigate through a rising rate environment. All of our products are based on a multi-asset class investment philosophy, a proven method of achieving meaningful diversification

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.

 

 

 

 

 

 

 

 

 

Investment Insights Podcast: Pointing towards a global re-acceleration

Hart_Podcast_338x284Chris Hart, Senior Vice President

On this week’s podcast (recorded December 12, 2016), Chris is back discussing how economic and market data have been more favorable and point towards a global re-acceleration.

Quick hits:

  • Risk assets continued to move higher
  • The past week saw a continuation of the “Trump Trade” where pro-growth and pro-cyclical areas of the markets fared best.
  • From an equity sector perspective, cyclicals such as Financials and Industrials continue to be the recipients of strong flows
  • Within fixed income, the credit backdrop remains supportive and treasury yields continue to rise.
  • Current expectations are for a hike in short term interest rates likely by 25 basis points
  • There is good participation across sectors and not the very narrow leadership environment we saw in 2015

For the rest of Chris’s insight, 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.