Amy Magnotta, CFA, Brinker Capital
We continue to approach our macro view as a balance between
cyclical tailwinds and more structural headwinds. While we have
seen some cyclical improvement in the economy, helped by easy
monetary policy, we continue to face global macro risks and
uncertainties. The unresolved macro risks could result in bouts of
market volatility and as a result portfolios have a modest defensive
bias, and are focused on high conviction opportunities within asset classes.
Accommodative monetary policy: The Fed has become even more accommodative with the announcement of further quantitative easing, an open-ended mortgage-backed securities purchase program, and they seem determined to continue until growth picks up. In addition, the Fed has pledged to keep interest rates low into 2015. The European Central Bank has also pledged support to defend the Euro and has committed to sovereign bond purchases of countries who apply for aid. Emerging economies have room to ease further if growth slows to an unacceptable level. There is the expectation that China will ease further to attempt to engineer a soft landing.
U.S. companies remain in solid shape: U.S. companies have solid balance sheets that are flush with cash that could be put to work through M&A, capital expenditures or hiring, or returned to shareholders in the form of dividends or share buybacks. While estimates are coming down, profits are still at high levels.
Housing market improvement: There is evidence that the housing market has bottomed and could soon be in a position to contribute to economic growth. Prices have stabilized and sales have increased over last year. Homebuilder confidence is at levels last seen in 2007. Housing inventories have fallen. Low mortgage rates and rising rents have driven affordability to record levels; however, credit remains tight.
U.S. fiscal cliff / U.S. election / U.S. fiscal situation: The current U.S. political environment does not inspire confidence. We face a significant fiscal cliff in 2013 due to expiring tax cuts and spending measures. With economic growth in the U.S. at stall speed, the size of the fiscal cliff could tip us into recession territory. There will be no resolution of the fiscal cliff until after the election is decided, which will result in greater uncertainty. We hope for a short-term extension of some of the measures, setting up for a larger tax and entitlement reform package to be debated in 2013. Fiscal policy uncertainty has led U.S. companies to put plans for additional hires and/or capital expenditures on hold until it is clear what the rules are.
European sovereign debt crisis and recession: While the ECB and EU leaders have pledged support to the Euro, actions need to follow words. Bond purchases by the ECB will not solve the problems in Europe, but it can buy policymakers time to make real reforms. However, growth will continue to weaken in the region. High unemployment combined with planned austerity measures have led to more social unrest.
Global growth slowdown: There is evidence of a slowdown in growth not only in developed markets, but also in emerging markets. Growth in the U.S. continues to be sluggish, leaving the economy susceptible to shocks. Europe is in recession territory. Growth in China has slowed and continues to show signs of further weakening.
Tensions in the Middle East: Geopolitical risks in the Middle East are cause for concern. A sharp rise in oil prices will be a negative shock to the global economy.
This commentary is intended to provide opinions and analysis of the market and economy, but is not intended to provide personalized investment advice. Statements referring to future actions or events, such as the future financial performance of certain asset classes, market segments, economic trends, or the market as a whole are based on the current expectations and projections about future events provided by various sources, including Brinker Capital’s Investment Management Group. These statements are not guarantees of future performance, and actual events may differ materially from those discussed. Diversification does not ensure a profit or protect against a loss in a declining market, including possible loss of principal. This commentary includes information obtained from third-party sources. Brinker Capital believes those sources to be accurate and reliable; however, we are not responsible for errors by third party sources on which we reasonably rely.