Investment Insights Podcast – August 13, 2014

Bill MillerBill Miller, Chief Investment Officer

On this week’s podcast (recorded August 11, 2014):

What we like: Fair amount of correction in the equity markets around the world; small correction also in U.S.

What we don’t like: U.S. stock market will likely correct closer to their 10% before the Fed finishes bond-buying program in October

What we’re doing about it: Hedging more during seasonally-weak time period; mindful of midterm elections

Click the play icon below to launch the audio recording or click here.

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.

Monthly Market and Economic Outlook: July 2014

Amy MagnottaAmy Magnotta, CFASenior Investment Manager, Brinker Capital

Equity markets continued to grind higher in the second quarter despite continued tapering by the Federal Reserve, a negative GDP print, and rising geopolitical tensions. All asset classes have delivered positive returns in the first half of the year, led by long-term U.S. Treasury bonds. There has been a lack of volatility across all asset classes; the CBOE Volatility Index (VIX) fell to its lowest level since February 2007.

Year to date the U.S. equity markets are slightly ahead of international markets. All S&P sectors are positive year to date, led by utilities and energy. Mid cap value has been the best performing style, helped by the double-digit performance of REITs. U.S. large caps have outperformed small caps, but after experiencing a drop of more than -9%, small caps rebounded nicely in June. Value leads growth across all market capitalizations.

Despite concerns surrounding the impact of Fed tapering on emerging economies, emerging market equities outperformed developed markets in the second quarter, and have gained more than 6% so far this year, putting the asset class ahead of developed international equities. Small cap emerging markets and frontier markets have had even Magnotta_Market_Update_7.09.14_1stronger performance. The dispersion of performance within emerging markets has been high, with India, Indonesia and Argentina among the top performers, and China, Mexico and Chile among the laggards. On the developed side, performance from Japan has been disappointing but a decent rebound in June bumped it into positive territory for the year-to-date period.

Despite a consensus call for higher interest rates in 2014, U.S. Treasury yields moved lower. The 10-year Treasury Note is currently trading at 2.6% (as of 7/7/14), still below the 3.0% level where it started the year. While sluggish economic growth and geopolitical risks could be keeping a ceiling on U.S. rates, technical factors are also to blame. The supply of Treasuries has been lower due to the decline in the budget deficit, and the Fed remains a large purchaser, even with tapering in effect. At the same time demand has increased from both institutions that need to rebalance back to fixed income after experiencing strong equity markets returns, and investors seeking relative value with extremely low interest rates in Japan and Europe.

With the decline in interest rates and investor risk appetite for credit still strong, the fixed income asset class has delivered solid returns so far this year. Both investment grade and high yield credit spreads continue to grind tighter. Emerging market bonds, both sovereign and corporate, have also experienced a nice rebound after a tough 2013. Municipal bonds benefited from a positive technical backdrop with strong demand for tax-free income being met with a lack of new issuance.

We approach our macro view as a balance between headwinds and tailwinds. We believe the scale remains tipped in favor of tailwinds, with a number of factors supporting the economy and markets over the intermediate term.

  • Global monetary policy remains accommodative: Even with quantitative easing slated to end in the fall, U.S. short-term interest rates should remain near-zero until 2015 if inflation remains contained. The ECB and the Bank of Japan are continuing their monetary easing programs.
  • Global growth stable: We expect a rebound in U.S. growth in the second quarter after the polar vortex helped to contribute to a decline in economic output in the first quarter. Outside of the U.S., growth has not been very robust, but it is still positive.
  • Labor market progress: The recovery in the labor market has been slow, but we have continued to add jobs. The unemployment rate has fallen to 6.1%.
  • 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. Corporate profits remain at high levels 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 in 2014, and the budget deficit has also declined significantly.

Risks facing the economy and markets remain, including:

  • Fed Tapering/Tightening: If the Fed continues at the current pace, quantitative easing will end in the fall. Risk assets have historically reacted negatively when monetary stimulus has been withdrawn; however, this withdrawal is more gradual and the economy appears to be on more solid footing this time. Should inflation pick up, market participants will shift quickly to concern over the timing of the Fed’s first interest rate hike. Despite the recent uptick in the CPI, the core Personal Consumption Expenditure Price Index (PCE), the Fed’s preferred inflation measure, is up only +1.5% over the last 12 months.
  • Election Year: While we noted there has been some progress in Washington, we could see market volatility pick up later this year in response to the mid-term elections.
  • Geopolitical Risks: The events surrounding Iraq, as well as Russia/Ukraine are further evidence that geopolitical risks cannot be ignored.

Risk assets should continue to perform if we experience the expected pickup in economic growth; however, we could see 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 remains overly optimistic, 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.

Asset Class


Favored Sub-Asset Classes

U.S. Equity


Large cap bias, dividend growers

Intl Equity


Emerging and Frontier markets, small cap

Fixed Income

Global high yield credit, short duration

Absolute Return


Closed-end funds, event driven

Real Assets


MLPs, natural resources equities

Private Equity




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.

The Implications Of The 2012 Presidential Election

This Tuesday marked the end of the 2012 Presidential Election campaign, with Barack Obama heading back to the White House.  In a campaign marked by elements of vitriol and an astronomical amount of money spent, most experts ballpark it around $6 billion in total, the results were status quo.   Republicans maintained their majority in the House, while the Democrats, after picking up a few surprise seats, remain in control of the Senate and Presidency.

As the new(ish) regime begins to game-plan for the next four years, a number of issues to address lay in wait.  The first, and potentially most significant, is the fiscal cliff the government must face before January 1, 2013.  With the Bush-era tax cuts expiring in conjunction with spending cuts, the U.S. economy will see about a 4% drag on GDP, forcing policymakers to address the looming recession.  The most likely scenario is an extension of most of the provisions already in place, which would result in a drag on GDP closer to 1%.

A key proponent in all of this is a compromise of tax increases on high-income earners—a significant area of compromise for President Obama. It would seem that the majority of investors are anticipating such a short-term deal to take place, but if no deal is signed before the end of the year, the market will react to the disappointment.

Next on tap for the President is a defined, long-term fiscal package. And while it will be a difficult task with a split government, it has been done before.  It is important for investors to have a roadmap to address our fiscal issues as it would reduce uncertainties, provide businesses and consumers with a higher level of confidence, and ultimately spend and contribute to positive growth. One strong point here is our high demand for U.S. Treasuries, even at current low rates.

With possible changes facing the Federal Reserve and tax increases, we are faced with a number of uncertainties.  We’ve crossed the election off our list of concerns and now turn our heads to the fiscal cliff. So as we head into year end, we will prepare for market volatility while keeping a close eye on what Congress is planning.

It’s Time for the “Cliff” Conversation by Sue Bergin

Sometimes the media grabs on to buzz phrases that instill fear in the minds of our clients.  The latest examples are the phrases “fiscal cliff” and “taxmageddon.”  Both phrases intentionally conjure images of impending doom.  They are meant to scare and that is entirely what they will do to your clients unless you get out in front of it.

As Susan Weiner points out in her Your Mother and the Financial Cliff blog post, it’s a mistake to assume clients and prospects understand financial vocabulary.  These terms may roll off the tongue easily, score millions of Google hits, and be repeated ad nauseam on the news, and still be misunderstood.

You have a fiduciary responsibility to focus on education.  Let clients know what the fiscal cliff means to the country and to the economy.  A good article to reference is What You Need to Know About the Fiscal Cliff, written by Morgan Housel for Daily Finance.

Your clients will look to you to size up the potential impact of the fiscal cliff on their portfolio and their life goals. You should be the person that delivers this news, rather than letting them stumble upon the MyTaxBurden calculator on the web (this calculator models an individual’s federal tax burden under three scenarios: full expiration of Bush-era and Obama tax cuts, the Republican plan to extend Bush-era cuts, and President Obama’s plan partially to extend these cuts for families making under $250,000 per year as well as extending tax cuts in the 2009 stimulus bill).

In the weeks remaining after the election and before the end of the year, the Congressional drama will unfold before us. Your client should be well informed as they observe the discourse just how critical the issue is to the country’s overall economic health. A “cliff” conversation now gives you the opportunity to outline potential strategies that will help minimize the client’s 2013 tax burden if a compromise is not reached. They should also have confidence that no matter the outcome, you will help ensure that they are best positioned.

Presidential Election Is Too Close To Call

Amy Magnotta, CFA, Brinker Capital

Scott Rasmussen, founder and President of Rasmussen Reports, spoke at our annual conference last week and provided some insights on the presidential election and how voters feel about the issues facing our country today.  Below are my notes from his fascinating speech:

  • The Senate is close but should remain in Democratic control. The House will stay in Republican control.
  • Job approval is the single most important number in determining the outcome of the election. Since December of 2009, President Obama’s job approval has been in the 47-48% range. This means he will get around 47-49% of the vote.
  • The economy is the biggest issue for voters. Today 35% of people feel good about the economy – the same number as in early 2009. So while they aren’t any better off, they don’t feel worse either.
  • For the Electoral College vote, Rasmussen has Obama with 237 and Romney with 235. Virginia is a must-win for Romney and it is one of the first states to report on Election Day (Rasmussen has Romney up by 2). Ohio is very close but there are no polls yet with Obama losing in the state. Scott thinks that Wisconsin could get interesting (currently tied at 49%). If Romney wins Virginia, he needs either Ohio or Wisconsin and another state for a win.
  • It is hard to see what could move the numbers now – there are hardly any true undecided voters left. Republicans are very enthusiastic. A high turnout will benefit Obama.
  • There is an overall rejection of political parties. There is a growing concern that something has gone fundamentally wrong in the country. Only 24% of people feel that today’s children will be better off than their parents. People are more pessimistic about the long-term vision for our country than at any point in our history.
  • Voters are concerned about our long-term fiscal situation and understand that reform is necessary, including reforms to Social Security and Medicare. When people are asked to give up money and authority there is painful resistance. The political process today is not equipped to handle this. We will spend the next 10-15 years working to close the gap between elite opinion in Washington and public opinion.
  • Change doesn’t come from political leaders. Politicians ratify what public opinion already did and then take credit for it. The public is always ahead of politicians. A good leader will tap into the public mood and give them a cause, but the decision was made ahead of them.
  • “You don’t get a mandate by winning an election, you get it by governing.”

Looking Past the Fiscal Cliff

Amy Magnotta, CFA, Brinker Capital

One of the major risks facing the U.S. economy and markets as we enter the final months of 2012 is the fiscal cliff.  The amount of expiring tax provisions and spending cuts is estimated to be over 3% of Gross Domestic Product (GDP), and with economic growth running below 2%, the fiscal cliff will put us into a recession.*

There will be no resolution on the fiscal cliff until after the election.  However, we are hopeful that a short-term extension of many of the policies will be agreed upon in the lame duck session of Congress. Some fiscal drag is likely – for example, neither party is in favor of extending the 2% payroll tax cut – but it should be closer to 1% of GDP.

One of the key tax provisions Congress needs to address this year is the Alternative Minimum Tax (AMT).  The current AMT patch expired in 2011, so it can only be retroactively fixed in 2012.  If not remedied, 30 million Americans with annual incomes of about $50,000 will get hit with the AMT when they file their taxes in early 2013.  This would be a political and economic disaster, and as a result may act as a catalyst for a short-term deal.

In addition, the debt ceiling must be raised soon.  In a lame duck session, the Democrat-controlled Senate may agree to extension of all of the Bush tax rates for an increase in the debt ceiling, especially if President Obama is reelected.

While a short-term deal would again kick the can down the road, it will hopefully set us up for a real tax and entitlement reform package in 2013.  We don’t have any other option – our fiscal situation demands real reforms as our current path is unsustainable. The specific path we take will depend on the outcome of November’s election, but regardless, our approach will have to address both the spending and revenue sides of the equation, as well as entitlement programs.

We currently have the luxury of being the beneficiary of the global flight to safety so our borrowing costs are extremely low.  How long can that continue?  We should take advantage and make the reforms before the market forces our hand as we are now seeing in Europe. The environment in Washington does not inspire confidence; however, lawmakers have little choice when faced with our fiscal reality.  Let’s just hope they focus more on effective policy and setting us on the right long-term path, and less on their short-term reelection concerns.

The following charts from Dan Clifton, Head of Policy Research at Strategas Research Partners, tell the story.  The real work must be done in 2013.

*Source: Strategas Research Partners

Phones Will Be Ringing by, Sue Bergin

For many advisors, the phone lines seem to simmer down just a bit during the summer months.  That is about to change, however, according to a recent survey conducted by Edward Jones.

In mid-July, 2012 Edward Jones interviewed 1,010 U.S. adults to determine the issues that will impact investment and savings decisions the most. They found that 90% of Americans plan to change their investment strategy in the next six months. 

The election was sited as the most significant reason for driving strategy changes.

39% percent of respondents indicated that the election was, again, the most significant reason prompting investment and savings changes.  The next most significant factor was healthcare costs, representing 30% of those surveyed.  Global economic issues were prompting 20% of the respondents to consider investment strategy changes.

96% of people earning more than $100,000 a year were the most likely to say that they will make changes to their investments and savings.[1]

Take advantage of these final few weeks of summer by proactively scheduling investment review meetings. This will give you more control over your calendar in the fall, and help you prepare for the discussions that will inevitably occur.