A lot can happen in two weeks

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

A lot can happen in two weeks – and you don’t have to be a fan of the great romantic comedy Two Weeks Notice to know that – just take a look at the economy and markets. (I do believe Sandra Bullock and Hugh Grant are both incredible comedic actors!)

Think about it, in the past two weeks we have contended with:

  • The S&P 500 Index (S&P 500) making a new, all-time high (Chart A)
  • Q1 GDP growth coming in at a much better than expected 3.2%
  • The VIX – Wall Street’s “Fear Index” – spiking 50% (Chart B)
  • The US unemployment rate falling to a 50-year low of 3.6%
  • The S&P 500 dropping 130 points, or 4.4%, peak to trough

Chart A

SP 500 all time high

Chart B

Fear Index VIX

The torrent of good news, bad news, and market volatility begs the question, what is going on? In a word – or in a few – concerns over US/China trade relations bumped up against strong economic growth and bullish investor sentiment. Said more plainly, the US economy has been surprising to the upside and that strong performance has been reflected in a robust rally for US equities and very bullish investor sentiment. So, when President Trump took a surprisingly hawkish tone toward China many investors quickly looked past strong near-term economic performance and began to price in a potential, trade war driven, economic slowdown – and did so in pretty jarring fashion.

Bumpy markets are never fun, and we do expect volatility to persist. We also see the US and China resolving their differences over trade. For now, we remain optimistic on the US economy and US equities.

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

Volatility vanishes (again), but it should be back (again)

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

More than once last summer, we were asked our thoughts on the early 2018 spike, and subsequent drop, in market volatility as measured by the VIX, Wall Street’s “Fear Index.” We noted we weren’t surprised by the return of volatility, an accelerating economy and rising rates were expected catalysts, nor its departure. We also believed volatility would be back, and back it was in the fourth quarter, before it vanished again. Given the rather volatile behavior of late – well, market volatility – we thought now was a good time to touch base on the topic.

To back up, in early 2018 the VIX spiked to 40 and the S&P 500 Index sold off sharply on a January jobs report that showed greater than expected wage inflation. While the economy and the market welcome modest inflation, an ever-present concern is accelerating inflation that forces the Federal Reserve (Fed) to raise interest rates aggressively, ultimately pushing the economy into a recession and stocks into a bear market. When there was little inflationary follow through post the January jobs report, and economic and earning reports continued to top expectations, volatility declined sharply and the market rallied strongly. That is until Q4 as investors grew concerned the Fed would raise rates and shrink its balance sheet more than economic and market conditions merited, and the US and China would enter a full blow trade war, the VIX spiked and stocks corrected. Then, as the Fed walked back its hawkish talk on rates and its balance sheet, and we received more good news than bad on the state of US/China trade negotiations and economic data came in largely as expected, the VIX peaked and the S&P 500 bottomed in late December. Since late December, the VIX has collapsed 23 points and the S&P 500 has rallied 19% – see the below chart for a look at volatility through 2018 and into 2019.

CBOE Volatility Index

While we welcome the move higher in the S&P 500 and the decline in the VIX, we doubt we have seen the last of market volatility, with potential catalysts including better than expected economic growth and US/China trade relations. However, a bumpy market isn’t a bear market, and as long as fiscal policy and monetary policy remain accommodative, and inflation contained, US equities should be biased 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

 

Investment Insights Podcast: As the first quarter comes to a close…


Andrew Goins
Investment Manager

On this week’s podcast (recorded March 29, 2018), Andrew reviews the markets as the first quarter comes to a close.

Quick hits:

  • January was very much a continuation of the momentum driven market of 2017, with the S&P 500 up 5.73% for the month, but that all changed as we rolled into February.
  • In addition to fears over trade wars and tariffs, a privacy scandal at Facebook as well as rhetoric around increasing regulation on mega cap tech companies has wreaked havoc on the FAANG stocks.
  • Despite the more recent weakness in the tech sector, growth stocks are still ahead of value so far this year.
  • We believe that active managers are positioned well to continue to take advantage of the higher volatility that is likely here to stay and should benefit as investors put a premium on quality and valuation.

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

investment podcast (24)

This is not a recommendation for Facebook, Amazon, Apple, Netflix and Google. These securities are shown for illustrative purposes only.

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: March 2018 market and economic outlook

Leigh Lowman, CFA, Investment Manager

On this week’s podcast (recorded March 9, 2018), Leigh provides a brief review of February markets.

 

Quick hits:

  • Market volatility came roaring back in February with the VIX index surging to levels last seen in 2015 and washing out signs of complacency that were present earlier in the year.
  • The S&P 500 Index finished the month down -3.7% and is up 1.8% year to date.
  • Developed international equities underperformed domestic equities for the month.
  • Within fixed income all sectors posted negative returns.
  • Overall, we continue to remain positive on risk assets over the intermediate-term.

Listen_Icon  Listen to the audio recording.

Read_Icon  Read the full March Market and Economic Outlook.

market outlook (2)

 

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.

 

Balancing Act

Joe PreisserJoe Preisser, Brinker Capital

Concern lurched back into the market place last week, as the specter of an eventual withdrawal of the extraordinary measures the U.S. Central Bank has employed since the financial crisis, served to temporarily rattle markets around the globe. Although stocks rebounded smartly as the week drew to a close, from what had been the largest two-day selloff seen since November, the increase in volatility is noteworthy as it spread quickly across asset classes, highlighting the uncertainty that lingers below the surface.

Equities listed in the United States retreated from the five-year highs they had reached early last week following the release of the minutes of the most recent Federal Open Market Committee (FOMC) meeting as the voices of those expressing reservations about continuing the unprecedented efforts of the Central Bank to stimulate the U.S. economy grew louder. The concern of these members of the Committee stems from a fear that the current accommodative monetary policy may lead to “asset bubbles” (Bloomberg News) that would serve to undermine these programs. “A number of participants stated that an ongoing evaluation of the efficacy, costs and risks of asset purchases might well lead the committee to taper, or end, its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred. The minutes stated.” (Wall Street Journal).

Tangible evidence of the unease these words created in the marketplace could be found in the Chicago Board Options Exchange Volatility Index, or VIX, which measures expected market volatility, as it leapt 19% in the aftermath of this statement representing its largest single-day gain since November 2011 (Bloomberg News). The reaction of investors to the mere possibility of the Fed pulling back its historic efforts illustrates the continued dependence of the marketplace on this intervention and highlights the difficulties facing the Central Bank in not derailing the current rally in equities when it eventually pares back its involvement.

A measure of the uncertainty surrounding the timing of the Federal Reserve’s withdrawal of its unprecedented efforts to support the U.S. economy was dispelled by St. Louis Fed President, James Bullard, in an interview he gave late last week. Mr. Bullard, currently a voting member of the FOMC, was quoted by CNBC, “I think policy is much easier than it was last year because the outright purchases are a more potent tool than the ‘Twist’ program was…Fed policy is very easy and is going to stay easy for a long time.”

Reports of statements made by The Chairman of the Federal Reserve, Ben Bernanke, earlier this month, which downplayed the potential creation of dangerous asset bubbles through the Central Bank’s actions, released Friday, helped to further assuage the market’s concerns. “The Fed Chairman brushed off the risks of asset bubbles in response to a presentation on the subject…Among the concerns raised, according to this person, were rising farmland prices, and the growth of mortgage real estate investment trusts. Falling yields on speculative-grade bonds also were mentioned as a potential concern” (Bloomberg News). Although the rhetoric offered by these members of the Federal Reserve in the wake of the release of the minutes of the FOMC was offered to alleviate fears, the text of the meeting has served as a reminder to the marketplace that the asset purchases currently underway, which total $85 billion per month, will be reduced at some point in the future, and as such, has served as a de facto tightening of policy.

Though investors appeared to be appeased by the words of Mr. Bullard as well as those of Mr. Bernanke, the steep selloff that accompanied the mention of a pull back of the Central Bank’s efforts is a reminder of the high-wire act the Fed is facing when it does in fact need to extricate itself from the bond market.