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.


Remembering September 11, 2001

Noreen BeamanNoreen D. Beaman, Chief Executive Officer, Brinker Capital

Today is a day of remembrance and reflection; a day where the gamut of emotions will be beyond words. We will grieve, empathize, reminisce, feel proud, and so much more as we take stock of the events that happened 13 years ago. Memories of the September 11, 2001 attacks are as vivid as ever today.

But despite the pain and anger spawned out of immense and unspeakable tragedy came a sense of community and resiliency. We have seen our economy hit historic lows and have had to weather the storm of plummeting markets. We have faced, and continue to face, terrorist threats and acts against our nation and fellow Americans. But we have shown great resolve rooted in the shared experience of September 11th. We are closer now, as individuals, families, and communities and are prepared to face whatever comes our way.

So on behalf of our family here at Brinker Capital, our thoughts are with all of those who lost their lives, their families, first responders, policemen and women, firefighters, doctors, nurses, and the everyday heroes who have helped make our nation stronger today.

Monthly Market and Economic Outlook: September 2014

Amy MagnottaAmy Magnotta, CFASenior Investment Manager, Brinker Capital

After a mild 4% pull-back from July 24 through August 7, the equity markets continued to grind higher while global bond yields fell. The S&P 500 Index gained 4% in August and crossed the 2000 level for the first time. Markets shook off elevated geopolitical tensions in Ukraine and the Middle East, and focused on stronger earnings from U.S. companies, better U.S. macroeconomic data, and the anticipation that central banks globally will remain supportive.

In the U.S., small cap stocks outpaced large caps in August, but large caps have a lead of more than 800 basis points on small caps year-to-date. Growth was ahead of value in August. In both large cap and small cap, growth has closed the gap and now lags value by only 50 basis points year-to-date; however, mid cap value still has a significant advantage over mid cap growth due to the very strong performance of REITs so far this year.

Developed international equity markets meaningfully lagged the U.S. in August, in part due to weaker currencies. Europe was slightly positive, but Japan declined more than -2%. Year-to-date, U.S. equities are almost 700 basis points ahead of the MSCI EAFE Index. However, emerging market equities posted another solid month and, after a very weak start to the year, are now ahead of U.S. equities. Brazil and India have each rallied more than 25% so far this year, while China has lagged with a gain of only 8%.

Global fixed income rallied along with equities in August. The yield on the 10-year U.S. Treasury Note fell 22 basis points to 2.34%, which still looks attractive relative to yields in the rest of the world.


All fixed income sectors positive for the month, led by credit and Treasuries. After high yield spreads widened in July and the asset class experienced significant redemptions, investors saw relative value and moved back into high yield in mid-August. The sector gained 1.6% for the month, and spreads still remain 40 basis points above the low reached in June.

We approach our macro view as a balance between headwinds and tailwinds. We believe the scale remains tipped in favor of tailwinds, and 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 remains accommodative: Even as we approach the end of quantitative easing, U.S. short-term interest rates should remain near-zero until 2015 if inflation remains contained. The ECB has taken more aggressive action to support the European economy by lowering interest rates even further and announcing the purchases of covered bonds and asset-backed securities. The Bank of Japan continues its aggressive easing program.
  • Pickup in U.S. Growth: U.S. economic growth rebounded in the second quarter. Capital spending appears to be recovering. The improvement in the labor market continues and job openings are surging. Leading economic indicators suggest the recovery has momentum.
  • U.S. companies remain in solid shape: U.S. companies have solid balance sheets that are flush with cash. M&A deal activity has picked up this year. Earnings growth has been ahead of expectations and margins have been resilient.
  • Less Drag from 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.

Risks facing the economy and markets remain, including:

  • Fed’s Withdrawal of Stimulus: Risk assets have historically reacted negatively when monetary stimulus has been withdrawn; however, tapering is more gradual and the economy appears to be on more solid footing this time. Should inflation pick up, market participants will quickly shift to concern over the timing of the Fed’s first interest rate hike. However, the core Personal Consumption Expenditure Price (PCE) Index, the Fed’s preferred inflation measure, is up only +1.5% over the last 12 months and we have not yet seen the improvement in the labor market translate into a level of wage growth that is worrisome.
  • Election Year/Seasonality: While we noted there has been some progress in Washington, we could see market volatility pick up in the next two months in response to the mid-term elections. In addition, September tends to be a weaker month for the equity markets.
  • Geopolitical Risks: The events in the Middle East and Ukraine could have a transitory impact on markets.

Risk assets should continue to perform over the intermediate term as we expect continued economic growth; however, we see the potential for increased volatility and a shallow correction as markets digest the end of the Federal Reserve’s quantitative easing program. Economic data, especially inflation data, will be watched closely for signs that could lead the Fed to tighten monetary policy earlier than expected. Equity market valuations look elevated, but not overly rich relative to history, and maybe even reasonable when considering the level of interest rates and inflation. Investor sentiment, while down from excessive optimism territory, is still elevated, but the market trend remains positive. In addition, credit conditions still provide a positive backdrop for the markets.

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.




Source: Brinker Capital

Brinker Capital, Inc., a Registered Investment Advisor. 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: September 2013

Magnotta@AmyMagnotta, CFA, Senior Investment Manager, Brinker Capital

The U.S. equity markets experienced a modest pullback in August, with a -2.9% decline in the S&P 500 Index, fueled by concern over the anticipated Fed tapering of asset purchases as well as a U.S.-led military strike on Syria. However, the index is still up +16.2% through August, the best start since 2003.

International equity markets fared better than U.S. markets in August despite the headwind of a stronger U.S. dollar.  So far this year, the return of developed international equities has been about half of the S&P 500 return while emerging market equities have declined -8.8%.  Both Brazil and India have experienced declines of more than -20.0%, suffering from significantly weaker currencies and slowing growth.

Fixed income outperformed equities in August on a relative basis, but the Barclays Aggregate Index still fell -0.5%.  Interest rates continued their move higher, and the yield curve steepened further. The yield on the 10-year U.S. Treasury note has increased 140 basis points from a low of 1.6% in early May, to 3% on September 5, fueled by the Fed’s talk of tapering asset purchases.  The technicals in the fixed income market have deteriorated markedly.  The rise in rates has not yet lost momentum, and investor sentiment has turned, causing large redemptions in fixed income strategies. Our portfolios remain positioned in defense of rising interest rates, with a shorter duration, emphasis on spread product and a healthy allocation to low volatility absolute return strategies.

Interest rates are normalizing from artificially low levels, but still remain low on a historical basis.  Despite slowing or ending asset purchases, the Fed has signaled short-term rates will be on hold for some time. Rising longer-term interest rates in the context of stronger economic growth and low inflation is a satisfactory outcome. In addition, the fundamentals in certain areas of fixed income strategies, including non-Agency MBS, high-yield credit and emerging-market credit, look attractive.

However, we continue to view a continued rapid rise in interest rates as one of the biggest threats to the U.S. economic recovery.  The recovery in the housing market, in both activity and prices, has been a positive contributor to growth this year.  Stable, and potentially rising, home prices help to boost consumer confidence and net worth, which impacts consumer spending in other areas of the economy.  Should mortgage rates to move high enough to stall the housing market recovery, it would be a negative for economic growth.

Outside of the housing market, the U.S. economy continues to grow at a modest pace.  Initial jobless claims, a leading indicator, have continued to decline.  Both the manufacturing and service PMIs have moved further into expansion territory. U.S. companies remain in solid shape and valuations do not appear stretched. M&A activity has picked up. Global economic growth is also showing signs of improvement, in Europe, Japan and even China.

However, risks do remain.  In addition to the major risk of interest rates that move too high too fast, the markets are anticipating the end of the Fed’s quantitative easing program.  Should the Fed follow through in reducing monetary policy accommodation, it will do so in the context of an improving economy.  Washington will again provide volatility generating headlines as we approach deadlines for the budget and debt ceiling negotiations.  However, unlike in previous years, there is no significant fiscal drag to be addressed.  In addition, the nomination of a new Fed Chairman and geopolitical risks (Syria) are of concern.  The market may have already priced in some of these risks.

Risk assets should do well if real growth continues to recover despite the higher interest rate environment; however, we expect continued volatility in the near term. As a result, in our strategic portfolios we remain slightly overweight to risk.  We continue to seek high conviction opportunities and strategies within asset classes.

Some areas of opportunity currently include:

  • Domestic Equity: favor U.S. over international, financial healing (housing, autos), dividend growers
  • International Equity: frontier markets, Japan, micro-cap
  • Fixed Income: non-Agency mortgage backed securities, short duration, emerging market corporates, global high yield and distressed
  • Real Assets: REIT Preferreds
  • Absolute Return: relative value, long/short credit, closed-end funds
  • Private Equity: company specific opportunities

 Asset Class Returns9.6.13_Magnotta_MarketOutlook