Happy New Year?

Stuart QuintStuart P. Quint, CFA, Senior Investment Manager & International Strategist

Although we are only nine business days into 2016, markets have gotten off to a rough start. As of January 13, 2016, the S&P 500 was down -7.7% while a moderate-risk[1] benchmark was down -4.2%. In fact, this year has seen the worst start to any calendar year on record.

Unlike past corrections, the catalyst for the recent sell-off in markets is less obvious. One thought is that we are seeing a delayed response to the Federal Reserve’s December rate hike. Markets appear displeased with the timing of the Fed’s action, given the stalling economic growth. In our opinion, the Fed should have considered raising rates a year ago when economic growth was stronger.

Another consideration, it’s conceivable that investors are finally grasping the reality of slower growth in China. This is a factor that we have monitored for quite some time (and a factor in being underweight large emerging markets); but, the timing as to why the markets are worrying about China now is less clear.

There are other factors, too, that might be contributing to the downbeat mood in markets:

  • Slowdown in the Chinese economy and continued devaluation of its currency
  • Continued weakness and flight of capital in emerging markets
  • Weak oil prices (lower capital spend offsetting benefit to consumers)
  • Narrow leadership of U.S. equities (e.g. “FANG” stocks driving markets – high valuation, momentum, expectations with little room for disappointment)
  • Selloff in high-yield bonds
  • Continued deterioration in U.S. and global manufacturing
  • Strengthening of U.S. dollar and its corresponding hit to corporate earnings
  • Ongoing weakness in corporate revenue growth and economic growth
  • 2016 U.S. presidential elections
  • Disappointment in global central bank actions (Europe, Japan, China)

While the picture painted above seems saturated in negativity, it’s not all doom and gloom. There are assuredly some more positive factors to consider:

  • Global policy remains accommodative, particularly in Europe and Japan
  • U.S. interest rates remain low by historic standards
  • Job creation in the U.S. remains positive
  • U.S. bank lending continues to grow at moderate pace
  • U.S. services (majority of U.S. economic activity) continue to show moderate growth
  • Looser U.S. fiscal policy should marginally contribute toward GDP growth in 2016 (estimated)
  • Economic growth in Europe appears stable, albeit tepid
  • Direct impact of emerging market weakness to U.S. economy is less than 5% of GDP

In terms of how we address this in our portfolios, we continue to monitor these conditions and are assessing the risks and opportunities. Within our strategic portfolios, such as our Destinations mutual fund program, we have marginally reduced stated risk within more conservative portfolios while maintaining a slight overweight to risk in more aggressive portfolios. Following the trend of the last several years, we have trimmed exposure to riskier segments, such as credit within fixed income and small cap within equities. Tactical portfolios entered the year with neutral to slightly-positive beta on near-term concerns of high valuations and China.

The S&P 500 has dominated all asset classes in recent years.  A potential end to that reign should not cause alarm, but instead refocus attention to the long-term benefits of diversification and why there are reasons to own strategies which do not just act like the S&P 500.

In general, investors should not panic but rather continue to evaluate their risk tolerance and suitability, as well as engage in consistent dialogue with their financial advisors. The turn of the calendar might just be the ideal time to review those needs.

[1] Theoretical benchmark representing 60% equity (42% Russell 3000 Index, 18% MSCI AC ex-US), and 40% fixed income (38% Barclay Aggregate and 2% T-Bill)

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: 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.

Investment Insights Podcast – April 15, 2015

Bill MillerBill Miller, Chief Investment Officer

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

What we like: More talk about a global synchronized recovery; U.S. driving global growth; more positive news out of Europe, Japan, and India; China’s better-performing stock market

What we don’t like: Higher equity valuations in U.S., meaning stock market has marched upward; earnings estimates in first quarter have ratcheted down; first quarter may be a temporary slowdown or a sign of a bigger slowdown ahead

What we’re doing about it: Closely watching first quarter earnings; anticipating positive guidance from U.S. companies

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 – February 28, 2014

Bill MillerBill Miller, Chief Investment Officer

On this week’s podcast (recorded February 27, 2014) we are back to the traditional format of what we like, what we don’t like, and what we’re doing about it:

  • What we like: ISI Homebuilding Survey surged this week, increasing odds that the overall economy will improve as the cold weather improves
  • What we don’t like: Investors don’t know if the recent slowdown is due to the cold weather or if there’s something greater at work beyond that
  • What we are doing about it: No major changes; view remains that markets will grind upwards all year long

Click the play icon below to launch the audio recording.

The views expressed are those of Brinker Capital and are for informational purposes only. Holdings are subject to change.