Investment Insights Podcast: The Reluctant Bull

Hart_Podcast_338x284Chris Hart, Core Investment Manager

On this week’s podcast (recorded August 19, 2016), Chris discusses the current market environment, the looming concerns for investors, and what to expect as we near the end of the summer cycle.

Listen to the podcast here, but first, a few quick hits:

  • Markets continue to move higher, leading experts to describe it as a “reluctant bull” with investors skeptical of the rally.
  • Concerns over oil, China, and the Federal Reserve continue to preoccupy the markets and are still worrisome, but perhaps less so than a few months ago.
  • Domestic stocks have risen in six of the last eight weeks thanks in part to more positive corporate results.
  • While the economy is late in the business cycle and not calling for an acceleration, the strength of the market is noteworthy.
  • As we enter the seasonally weak late summer period in the markets, uncertainty remains especially with the upcoming election.
  • Overall, we remain constructive on risk assets but cautious in our outlook and we maintain our focus on finding select opportunities to take advantage of.

For Chris’s full 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.

April 2016 Monthly Market And Economic Outlook

Amy MagnottaAmy Magnotta, CFASenior Investment Manager, Brinker Capital

After an extremely volatile quarter, the broad equity market indexes ended just about where they started. Risk assets began the year under heavy pressure, with the S&P 500 Index declining more than -10% to a 22-month low on February 11. Concerns over the global growth outlook and the impact of further weakness in crude oil prices weighed on investors, and investor sentiment hit levels of extreme pessimism. Then we experienced a major reversal beginning on February 12, helped by a rebound in oil prices after Saudi Arabia and Russia agreed to freeze production, and more dovish comments by the Federal Reserve. Expectations regarding the pace of additional rate hikes by the Fed have been tempered from where they started the year.

All U.S. equity sectors ended the quarter in positive territory except for healthcare and financials. Dividend paying stocks significantly outperformed, resulting in a strong quarter for both the telecom and utilities sectors, and value indexes overall. From a market capitalization perspective, mid-caps outperformed both large and small caps, helped by the strong performance of REITs, another yield-oriented asset class.

Developed international equity markets lagged U.S. equity markets in the first quarter despite benefiting from a weaker U.S. dollar. Japan and Europe were particularly weak despite additional easing moves by their central banks, while the commodity-sensitive countries, such as Canada and Australia were positive for the quarter. Emerging markets outperformed U.S. equity markets for the quarter despite declines in China and India. Brazil was the strongest performer, helped by a rebound in the currency, expectations for political change, and the bounce in commodity prices.

ECBBonds outperformed stocks during the quarter, and did not even decline during the risk-on rally. Additional easing from the European Central Bank and a negative interest rate policy in Japan prevented U.S. bond yields from moving higher.

All fixed income sectors were positive for the quarter, led by corporate credit, which benefited from meaningful spread tightening, and TIPS, which benefited from their longer duration. Municipal bonds delivered positive returns, but lagged taxable fixed income.

We remain positive on risk assets over the intermediate-term; however, we acknowledge that we are in the later innings of the bull market that began in 2009 and the second half of the business cycle. The worst equity market declines are typically associated with recessions, which are preceded by aggressive central bank tightening or accelerating inflation, factors which are not present today. While our macro outlook is biased in favor of the positives and a near-term end to the business cycle is not our base case, the risks must not be ignored.

A number of factors we find supportive of the economy and markets over the near term.

  • Global monetary policy remains accommodative: Despite the Federal Reserve beginning to normalize monetary policy with a first rate hike in December, their approach is patient and data dependent. The Bank of Japan and the ECB have been more aggressive with easing measures in an attempt to support their economies, and China is likely going to require additional support.
  • Stable U.S. growth and tame inflation: U.S. economic growth has been modest but steady. Payroll employment growth has been solid and the unemployment rate has fallen to 5.0%. Wage growth has been tepid at best despite the tightening labor market, and reported inflation measures and inflation expectations, while off the lows, remain below the Fed’s target.
  • U.S. fiscal policy more accommodative: With the new budget fiscal policy is poised to become modestly accommodative in 2016, helping offset more restrictive monetary policy.
  • Solid backdrop for U.S. consumer: The U.S. consumer should see benefits from lower energy prices and a stronger labor market.

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

  • Risk of policy mistake: The potential for a policy mistake by the Fed or another major central bank is a concern, and central bank communication will be key. In the U.S. the subsequent path of rates is uncertain and may not be in line with market expectations, which could lead to increased volatility. Negative interest rates are already prevalent in other developed market economies.
  • Slower global growth: Economic growth outside the U.S. is decidedly weaker, and a significant slowdown in China is a concern.
  • Another downturn in commodity prices: Oil prices have rebounded off of the recent lows and lower energy prices on the whole benefit the consumer; however, another significant leg down in prices could become destabilizing.
  • Further weakness in credit markets: While high yield credit spreads have tightened from February’s wide levels, further weakness would signal concern regarding risk assets more broadly.

The technical backdrop of the market has improved, as have credit conditions, while the macroeconomic environment remains favorable. Investor sentiment moved from extreme pessimism levels in early 2016 back into more neutral territory. Valuations are at or slightly above historical averages, but we need to see earnings growth reaccelerate. We expect a higher level of volatility as markets assess the impact of slower global growth and actions of policymakers; however, our view on risk assets tilts positive over the near term. Higher volatility has led to attractive pockets of opportunity 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 – Central Banks Back Economies

miller_podcast_graphicBill Miller, Chief Investment Officer

On this week’s podcast (recorded March 17, 2016), Bill explains why recession concerns should continue to lessen and what to expect from the upcoming earnings season:

What we like: Recent Wall Street Journal survey indicates that investors are becoming less fearful of a recession; that trend should continue as central banks across the world are firmly standing by their economies–Janet Yellen most recently

What we don’t like: Second quarter earnings season likely to have residual effects from the weak first quarter; markets may trend sideways for a time; corporations have been the largest buyers of stock but have to step aside during earnings season

What we’re doing about it: Continuing to look for opportunities within high-yield, energy and natural resources

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 – Markets Rally in Anticipation of G20 Summit

miller_podcast_graphicBill Miller, Chief Investment Officer

On this week’s podcast (recorded February 26, 2016), Bill discusses the recent string of positive news, the hopeful outcome following the G20 Summit, and what still remains as cause for concern:

What we like: G20 Summit underway to discuss new policies intended to help support economic growth around the world; Communist party in China soon to meet to discuss five-year plan; stock markets have rallied a bit recently

What we don’t like: Economic data continues to be mixed; need a steadier drumbeat of good data to gain more confidence

What we’re doing about it: Tactically speaking, we are leaning towards a more bullish stance; monitoring the stabilization of oil 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. Brinker Capital, Inc., a Registered Investment Advisor.

Investment Insights Podcast – Hope Springs Eternal

miller_podcast_graphicBill Miller, Chief Investment Officer

On this week’s podcast (recorded February 11, 2016), Bill addresses the current market climate and why there is reason to remain hopeful:

What we don’t like: Stocks are down around 10% in general; European stock markets are down even more; Asian markets down the most; it’s a tough environment for investors

What we like: We don’t believe this is a long-term bear market and don’t see a recession hitting the U.S.; labor and wages are positive; auto and housing is good as well; economy seems sturdy despite volatile market behavior; China poised to finalize five-year plan including lowering corporate tax rates and addressing government debt levels; ECB should start to show more support for its major banks

What we’re doing about it: Most of the damage is done; more sensible to see what we should buy or rotate into; hedged pretty fully in tactical products; staying the course in more strategic products

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.

“It’s not nice to fool Mother Nature”

Miller_HeadshotBill Miller, Chief Investment Officer

“It’s not nice to fool Mother Nature” was the slogan used by Chiffon margarine, manufactured and trademarked by Anderson, Clayton and Company in the 1970s. It’s a catchphrase that is somewhat still indicative of the current market weakness in that China is meddling too much with its markets and currency.

Global risk assets are wrestling with the issue of “price discovery.” China is in the headlines for fooling both with its stock market and its currency. To speak as the Federal Reserve, this is probably not a “transient” problem.

The bar chart below titled, “China’s Stocks Still World’s Most Expensive after Rout,” indicates that the median Chinese stock is two to three times more expensive than other stocks globally. Such a large gap begs the question—are Chinese stocks worth it? Doubtful. China has a slowing economy, overvalued currency, overcapacity in many industries, and a lot of debt.

Last August, when we saw headlines such as “China meddling in stock market seen discouraging return of foreign funds” (Reuters – Aug 6, 2015), “China’s market meddling could do more harm than good” (CNN Money – July 28, 2015), and “China’s stocks keep falling because of government’s inept meddling” (INVESTORS.com – August 26, 2015), some of us wondered if we had just seen a preview of the future.

This week’s action seems to indicate, “yes.” China closed its stock exchanges twice and injected money at least once this week did little. On January 7, China also lifted its restriction imposed last summer on sales of shares held by large institutions. Now, investors have no idea what Chinese equities are worth. Price discovery will likely take time there.

Miller_China_Chart1

Source: Bloomberg

All of this, of course, leads us to sovereign bond markets around the world, most notably in the U.S., Europe and Japan. Central banks in these three developed economies have kept interest rates near zero for years now.

The European Central Bank appears increasingly willing to double down on this bet.

Miller_China_Chart2

Source: European Central Bank, Bloomberg

No doubt “fooling with Mother Nature” lurks in the minds of many investors. It is hard to fathom paying the government to save your money; but, that is exactly what German investors do when they purchase two-year German Treasury bonds at a -0.375% yield! Just think of all the retirees around that world that have been forced out of safe government bonds and bank certificate of deposits into higher-yielding riskier investments because they need income. There is a popular acronym for this forced behavior, TINA–There Is No Alternative.

To help quell this thought inside investor’s minds, check out Five Answers for the Voices in Your Head.

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.

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.

China Currency Admitted to IMF Major Leagues: The End of U.S. Dollar Supremacy?

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

On November 13, the International Monetary Fund (IMF) gave a preliminary indication that it would include the Chinese currency, the RMB, for the first time in its basket of approved reserve currencies, or Special Drawing Rights (“SDRs”). Undoubtedly, China has gained international prestige due to its partial liberalization of its capital accounts as well as its position as the second largest economy in the world after the U.S.

Does this mean the end of the supremacy of the U.S. Dollar?

60% of reserves of foreign central banks are held in U.S. Dollars.[1] Chinese RMB comprise less than 1%. While foreign central banks are likely to accumulate more RMB over time, there remains some questions as to how quickly it could rise in the near term.

First, Chinese bond markets would need to develop deeper liquidity. In order to invest in a currency, central banks would demand liquid investments denominated in the currency. Today, the U.S. bond market is magnitudes deeper than that in China.[2]

Second, it’s not in China’s best interest to immediately go to fully-free capital accounts. Exports are in decline due in part to weak global demand. The last thing the Chinese government would want to do is to put further pressure on exporter margins with a strong currency buttressed by sudden foreign capital inflows. One case in point is the August devaluation of the Chinese RMB that spooked financial markets.

While China has made progress in financial reform—partial liberalization of interest rates and opening up access to its stock markets—China has not opened up its currency to full convertibility and free capital flows.

Furthermore, recent government intervention in the stock market and economy does not provide investors assurance on long-term governance. Neither the Chinese nor the IMF can simply legislate a track record of responsible governance overnight. Time and consistency are needed to win investor confidence.

[1] http://worldif.economist.com/article/6/what-if-the-yuan-competes-with-the-dollar-clash-of-the-currencies , accessed on November 13, 2015.

[2] See http://www.wsj.com/articles/why-investors-shy-away-from-chinas-6-4-trillion-bond-market-1437593482?alg=y , accessed on November 16, 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, a Registered Investment Advisor.

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.

Debt and Skepticism: A Millennial Mindset

Dan WilliamsDan Williams, CFPInvestment Analyst

Having overshot 30 by a couple of years, I have had to come to terms with the many changes that come with my new age group. Some good, such as lower car insurance rates. Some bad, such as feeling that 9:00pm is closer to the departure time rather than arrival time for a social gathering. Some are mixed; being called “sir” with a high consistency and no tone of irony. I am also no longer considered to be part of the “young adult” group that is said to represent the emerging consumers in the economy and, subsequently, more closely studied by market researchers. These new kids on the block, known as the Millennials, had the financial crisis occur just as many were entering college and the workforce and were beginning to make their first big life decisions. Not surprisingly, they now think about money differently than I did at their age, just a brief decade ago. So what is the current financial mindset of this group some seven years later?

Goldman Sachs reported, in a June 2015 study, as shown below, that this group upon receiving a windfall of cash would look to pay down debt more than any other option by a wide margin.

Williams_chart1

Goldman Sachs Research Proprietary Survey

The result is not entirely unsurprising given that a majority of college students graduate with debt and, often, this debt is of a daunting amount. However, the magnitude of this victory reflects an overall conservative outlook on how to manage their financial matters.

The second finding, shown below, is of greater concern as it shows Millennials to be very skeptical of investing in the stock market. When asked whether investing in the stock market was a good idea for them, less than 20% answered that the stock market is the best way to save for the future. Approximately twice this amount claimed ignorance, fear of volatility, or lack of perceived fairness as reasons to avoid the stock market. Clearly, the events of the financial crisis have left scars on this group that have yet to heal.

Williams_chart2

Goldman Sachs Research Proprietary Survey

I am left feeling very conflicted for this group’s future financial health. On one hand, it’s very admirable that, unlike some prior young adult groups, this group has realized early on that debt is not something you simply attempt to defer payment of indefinitely. At least in the case of high interest credit card debt, it is hard to find fault with the pay-down-the-debt option as a sound financial decision. However, an inflexible focus on debt repayment combined with shunning or deferring of investing in the equity markets represents a significant challenge to this group’s ability to save meaningfully for the future.

Quite simply, equity investing has been proven to be one of the best ways to grow purchasing power over time. One advantage the Millennials have is ample time to invest, ride out periods of market volatility and let returns compound. To forego any portion of this advantage has potential to be tragic for future savings. Consider a one-year delay in retirement investing at the start of a career The missed opportunity is more than just the amount of one year’s contribution; rather that one year’s contribution compounded with typically 40+ years of returns until retirement. Over 40 years, a single $5,000 investment compounded at 8% becomes over $100,000. Six consecutive years of $5,000 contributions compounds to over $500,000. This is the potential cost of delaying investing just for “a couple of years.” In other words, earlier contributions are invested longer and can compound to greater amounts. On a per-dollar basis, these are the most impactful retirement contributions.

Contribution at start of year Value of contribution at end of year 40, assuming 8% return per year
Year 1 $5,000 $108,622.61
Year 2 $5,000 $100,576.49
Year 3 $5,000 $93,126.38
Year 4 $5,000 $86,228.13
Year 5 $5,000 $79,840.86
Year 6 $5,000 $73,926.72
Total $542,321.72

Source: Brinker Capital

Albert Einstein said, “Compounding interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” More attention is given by advisors to older clients with more assets and fewer years until retirement. Often this is due to the fact that clients become more tuned into investing matters as they begin to see the light at the end of the tunnel (whether it be the light of retirement or the oncoming train of insufficient savings). However, the greater opportunity for advisors to help a client’s future financial situation occurs earlier on in a client’s investment life. Helping young clients start off with good financial decision making, such as early investing, and letting these good decisions compound, is likely one of the best ways he or she can add value. Each client situation is different as each client has different goals. However a secure retirement is likely a very common dream and as Langston Hughes wrote, “A dream deferred is a dream denied.” Anything that we can do to ensure those dreams are not deferred is truly good work.

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.