Monthly Market and Economic Outlook – July 2013

Magnotta@AmyMagnotta, CFA, Senior Investment Manager, Brinker Capital

Risk assets were off to a decent start in the second quarter but then retreated after Federal Reserve Chairman Ben Bernanke’s testimony to Congress on May 22 laid the ground work for a reduction in monetary policy accommodation through tapering their asset purchases as early as September. While the U.S. equity markets were able to end the quarter with decent gains, developed international markets were relatively flat and emerging markets experienced sizeable declines. Weaker currencies helped to exacerbate these losses.

After starting to move higher in May, interest rates rose sharply in June and into early July, helped by the fears of Fed tapering. The yield 10-year U.S. Treasury has increased 100 basis points over the last two months to a level of 2.64% (through 7/10). The increase in rates was all in real terms as inflation expectations fell. Bonds experienced their worst first half of the year since 1994, in which we experienced four short-term rate hikes before June 30.

7.12.13_Magnotta_MarketOutlook_2While we have seen these levels of rates in the recent past (we spent much of the 2009-2011 period above these levels), the sharpness of the move may have been a surprise to some fixed income investors who then began to de-risk portfolios. In June, higher-risk sectors like investment-grade credit, high-yield credit and emerging market debt, as well as longer duration assets like TIPS, fared the worst. With growth still sluggish and inflation low, we expect interest rates to remain relatively range-bound over the near term; however, we do expect more volatility in the bond market. Negative technical factors like continued outflows from fixed income funds could weigh on the asset class. Our portfolios remain positioned in defense of rising interest rates, with a shorter duration, emphasis on spread product and a healthy allocation to low volatility absolute return strategies.

After weighing on the markets in June, investors have begun to digest the Fed’s plans to taper asset purchases at some point this year. Should the Fed follow through with their plans to reduce monetary policy accommodation, it will do so in the context of an improving economy, which should be a positive for equity markets.

7.12.13_Magnotta_MarketOutlook_3We 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 into the second half of the year. A number of factors should continue to support the economy and markets for the remainder of the year:

  • Monetary policy remains accommodative: The Fed remains accommodative (even with the scale back on asset purchases short-term interest rates will remain low), 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. This liquidity has helped to boost markets.
  • Fiscal policy uncertainty has waned: After resolutions on the fiscal cliff, debt ceiling and sequester, the uncertainty surrounding fiscal policy has faded. The U.S. budget deficit has improved markedly, helped by stronger revenues. Fiscal drag will be much less of an issue in 2014.
  • Labor market steadily improving: The recovery in the labor market has been slow, but steady. Monthly payroll gains over the last three months have averaged 196,000 and the unemployment rate has fallen to 7.6%. The most recent employment report also showed gains in average hourly earnings.
  • Housing market improvement: An improvement in housing, typically a consumer’s largest asset, is a boost to net worth, and as a result, consumer confidence. However, a significant move higher in mortgage rates, which are now above 4.5%, could jeopardize the recovery.
  • 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. Corporate profits remain at high levels and margins have been resilient.

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

  • 7.12.13_Magnotta_MarketOutlook_4Fed mismanages exit: If the economy has not yet reached escape velocity when the Fed begins to scale back its asset purchases, risk assets could react negatively as they have in the past when monetary stimulus has been withdrawn.
  • Significantly higher interest rates: Rates moving significantly higher from here could stifle the economic recovery.
  • Europe: The risk of policy error in Europe still exists. The region has still not addressed its debt and growth problems; however, it seems leaders have realized that austerity alone will not solve its problems.
  • China: A hard landing in China would have a major impact on global growth. A recent spike in the Chinese interbank lending market is cause for concern.

We continue to seek high conviction opportunities and strategies within asset classes for our client portfolios. Some areas of opportunity currently include:

  • Domestic Equity: favor U.S. over international, dividend growers, financial healing (housing, autos)
  • International Equity: frontier markets, Japan, micro-cap
  • Fixed Income: non-Agency mortgage backed securities, short duration, emerging market corporates, global high yield and distressed
  • Real Assets: REIT Preferreds
  • Absolute Return: relative value, long/short credit, closed-end funds
  • Private Equity: company specific opportunities

Asset Class Returns

Happy Holidays from Brinker Capital

Chuck Widger, Executive Chairman, Brinker Capital

Chuck_HolidayVideoChuck Widger
“This is just a short holiday message from all of us here at Brinker Capital.  All of us —  staff, management and the firm’s Executive Committee wish you, investors, advisors, your colleagues, and families the happiest of holiday seasons.  We hope that all of you will take time in the coming holiday season to get some rest and share quality time with those who mean the most to you.  A good quality of life involves a constructive and productive work experience and the joy of time spent with family and friends.”

2012 Highlights

  • Strategies favoring capital preservation have protected client assets
  • Strategies emphasizing income have delivered competitive yields
  • Absolute return strategies have managed volatility and provided appreciation
  • Accumulation strategies have participated and created attractive appreciation

“During this holiday season, as in holiday’s past, all of us at Brinker not only have you, the investors and advisors we serve, at front of mind.  But we also have in mind those in need, and organizations which serve those in need.  Contributions by Brinker have been made to Teach for America, The Wounded Warrior Project and The ALS Association.

With your good health in mind, Happy Holidays everyone.”

Some is More Like 6.5 Million

LinkedIn, social media darling of financial advisors, recently confirmed a security breach. It was reported that 6.5 million encrypted passwords were compromised and that some were posted on a Russian hacker website.

LinkedIn has invalidated all compromised passwords and notified the impacted members.

While only approximately 10% of LinkedIn’s 161 million user base have suffered from this security breach, it does serve as a healthy reminder to the remaining 90%–create a unique password for every online account you maintain.

Out of sheer convenience, many advisors use the same password for access to social media sites, mobile applications, and even financial accounts. This practice leaves the user vulnerable if the password falls in the wrong hands.

There are many digital tools on the market to help generate strong passwords and organize them more efficiently than with the current method of a sticky note in your top drawer, or a card in your Rolodex.

According to LifeHacker, a wildly popular blog that recommends downloads, websites and digital shortcuts, the best password managers are:


To read LifeHacker’s full review of these password management systems, click here.