@AmyMagnotta, CFA, Brinker Capital
Risk assets continued their run in April, despite a small 3% pull-back mid-month. The easy monetary policies pursued by central banks in developed economies have forced investors out of cash and into higher yielding fixed income and equity strategies. On May 3 the S&P 500 pushed above 1600 to an all-time high. International equity markets outperformed U.S. equity markets in April, helped by continued strong performance from the Japanese equity markets, but U.S. markets continue to lead year to date. Even with stronger equity markets, the fixed income markets also rallied in April as interest rates moved lower and credit spreads tightened further.
After a near 20% move in the U.S. equity markets since November of last year, we may be susceptible to a pull-back in the near term; however, our longer-term view remains constructive. The market remains in a stronger fundamental position that at the 2007 high.
We continue to approach our macro view as a balance between headwinds and tailwinds. We believe the scale remains tipped in favor of tailwinds as we move through the second quarter. A number of factors should continue to support the economy and markets for the remainder of the year:
- Global Monetary Policy Accommodation: The Fed continues with their quantitative easing program, the ECB has pledged to support the euro, and now the Bank of Japan is embracing an aggressive monetary easing program in an attempt to boost growth and inflation. The markets remain awash in liquidity.
- Housing Market Improvement: Home prices are increasing, helped by tight supply. Sales activity is picking up, and affordability remains at high levels. An improvement in housing, typically a consumer’s largest asset, is a boost to consumer confidence.
- U.S. Companies Remain in Solid Shape: U.S. companies have solid balance sheets that are flush with cash that could be reinvested or returned to shareholders. Borrowing costs remain very low. Corporate profits remain at high levels and margins have been resilient.
- Equity Fund Flows Turn Positive: After experiencing years of significant outflows, investors have begun to reallocate to equity mutual funds. Positive flows could provide a tailwind to the global equity markets.
However, major risks facing the economy and markets remain, including:
- Europe: The ECB programs have bought time, but cannot solve the underlying problems in Europe. Austerity measures are serving only to weaken growth further and cause higher unemployment and social unrest. After how it dealt with Cyprus, there is risk of policy error in Europe once again.
- U.S. Fiscal Policy: The automatic spending cuts will start to negatively impact growth in the second quarter, shaving an estimated 0.5% from GDP. In addition, the debt ceiling will need to be addressed again later this year.
Because of massive government intervention in the global financial markets, we will continue to be susceptible to event risk. Instead of taking a strong position on the direction of the markets, we continue to seek high conviction opportunities and strategies within asset classes. Some areas of opportunity currently include:
- Domestic Equity: dividend growers, housing-related plays
- International Equity: Japan, small and micro-cap emerging markets, frontier markets
- Fixed Income: non-Agency mortgage backed securities, corporate credit, short duration strategies
- Real Assets: REIT Preferreds, Master Limited Partnerships
- Absolute Return: relative value, long/short credit
- Private Equity: company specific opportunities
The views expressed by Brinker Capital are for informational purposes only. Brinker Capital, Inc. a Registered Investment Advisor.