Blog Site: May 2013

Key U.S. Economic News

Non-farm payrolls increased +236,000 in February. Gains in previous months were revised downward by -15,000. Average hourly earnings increased +0.2% and hours worked +0.3%, supporting the consumer. The unemployment rate fell two ticks to 7.7%; however, the labor force participation rate fell back to its recent low of 63.5%. The broader U-6 measure of unemployment ticked down to 14.3%.
GDP growth in the fourth quarter of 2012 was revised from slightly negative (-0.1%) to slightly positive (+0.1%).
The ISM Manufacturing Index climbed 1.1 points to 54.2% in February. The New Orders and Production components experienced nice gains, while the Employment index fell. Growth in the manufacturing economy was broad based, with fifteen of eighteen industries reporting growth.
The ISM Non-Manufacturing Index edged up 0.8 points to 56.0% in February. The New Orders and Production components indicated a faster rate of growth. Thirteen of eighteen industries reported growth.
Industrial production edged down -0.1% in January as manufacturing output declined -0.4%. Industrial production is 2.1% higher than its level a year ago. The capacity utilization rate fell to 79.1%, a level 1.1 percentage points below its long-run average.
Durable goods orders fell -5.2%, but excluding transportation orders increased +1.9%.
Retail sales increased just +0.1% in January, likely weighed down by the expiration of the payroll tax cut. Sales are +4.4% above year ago levels.
Disposable personal income fell -4.0% in January, a reversal from December’s +2.7% increase, due to accelerated bonus payments and higher individual tax rates. Personal consumption expenditures increased +0.2%. The savings rate fell four percentage points to 2.4%.
Inflation measures remained tame in January.
The producer price index increased +0.2%. Food prices were higher for the month, but energy prices were lower. Over the last 12 months, the PPI has increased a mild +1.4%.
The consumer price index was unchanged and has increased +1.6% over the last 12 months. Excluding food and energy the price index increased +0.3% in January and is up +1.9% over the last 12 months.
Housing continued to show signs of improvement in January. Inventories are at low levels.
Housing starts fell -8.5% to a SAAR of 890,000. The decline was primarily due to multi-family as single family starts increased +0.8% during the month. Starts remain 23.6% above year-ago levels.
Existing home sales edged up +0.4% to a SAAR of 4.92 million. December sales were revised downward. Supply of existing homes continues to tighten and now represent a 4.2 month supply, the lowest since April 2005.
New home sales rose +15.6% to a SAAR of 437,000. Supply remains tight at 4.1 months.
The S&P/Case-Shiller national home price index showed an increase in home prices of +7.3% for 2012. Nineteen of twenty MSAs posted positive year-over-year growth.
The Conference Board Leading Economic Index rose +0.2% in January, helped by financial components and housing permits.

Key U.S. Policy News

The sequester (the automatic spending cuts agreed to as part of the debt ceiling compromise in 2011) went into effect on March 1. The cuts will total $85 billion this year.

The minutes from the last FOMC meeting suggested that the Federal Reserve is considering slowing the pace of the current quantitative easing program.

Key Market Data and Events

Annualized for periods greater than one year. Past performance is no guarantee of future results. Source: FactSet, Red Rocks Capital. Total returns as of 02/28/13.

After a very strong January, the US equity markets trended higher to start off February, but mid-month investors shifted more defensively due to concerns of the Fed slowing or ending its asset purchases sooner than expected, the outcome of the Italian elections and the sequester. Despite this rough patch, US markets moved higher in the last week of the month and ended with a gain of over +1%.
Defensive sectors led in February, with Consumer Staples gaining more than 3%, and Telecom and Utilities each gaining more than 2%. Materials and energy lagged.
Value led growth across all market capitalizations and mid caps edged out both large and small caps. Mid cap value is the top performing style so far this year.
International equities lagged the US markets as the US dollar strengthened meaningfully versus both developed and emerging market currencies.
International developed markets continued to outpace emerging markets in February, but performance was mixed. Most European markets declined with Japan and Australia were strong performers.
Within emerging markets small caps outperformed large caps and were positive for the month. The BRIC economies were down more than -4%, but smaller markets like Indonesia and Malaysia delivered positive returns.
Interest rates moved slightly lower during the month. The 10-year Treasury yield hovered around 2% for most of the month but ended February at a level of 1.89%.
Corporate credit spreads remained relatively stable during the month and investment grade credit outpaced the return of the Barclays Aggregate by 20 basis points. Higher quality names led lower quality names.
Municipal bonds lagged taxable bonds in February but have outperformed year to date. Lower quality municipals outpaced higher quality credits.
Global REITs continue to deliver solid performance helped by the strong performance of Asian properties.
The entire commodity complex experienced a drawdown in February. Precious metals and industrial metals declined more than -5%, while energy and agriculture each fell more than -4%.
Listed private equity has been on a tear, gaining more than +12% so far this year, further narrowing discounts to net asset value.

Outlook

Risk assets started the year on a tear despite an increase in volatility in mid-February as macro risks moved back into view. Easy monetary policy has forced investors out of cash and into higher yielding fixed income and even equity strategies.

A number of positives exist that could continue to support markets and the economy in 2013. Central banks globally remain accommodative and stand ready to implement more extraordinary measures if necessary. The anticipated fiscal drag has been reduced and Congress has eliminated near term uncertainty surrounding tax rates. The U.S. housing market is also in a position to contribute to growth in 2013, boosted by pent up demand for household formation, firmer prices, and a high level of affordability. U.S. companies remain healthy with solid balance sheets flush with cash that can be invested in people or capital expenditures. The labor market is healing, albeit slowly. Equity market valuations remain reasonable, especially relative to other asset classes like fixed income.

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

U.S. policy uncertainty continues: While the fiscal cliff deal resolved some of the uncertainty on the tax side, the fiscal policy uncertainty and drama in Washington continues. The sequester is now in place, but depending on its impact on growth in short-term, there could be pressure to delay or stop the spending cuts. Next we have the continuing resolution that funds the government which expires on March 27. The debt ceiling will need to be addressed again later in the second quarter. The fiscal cliff deal did little to address our long term unsustainable fiscal path, and a lack of a credible plan of action this year to stabilize our debt to GDP ratio may trigger another downgrade of our sovereign debt.

European sovereign debt crisis and recession:

The promise of bond purchases by the ECB has driven down borrowing costs for problem countries and bought policymakers time, but it cannot solve the underlying problems in Europe. Austerity measures are serving only to weaken growth further and cause higher unemployment and social unrest.

Sluggish global growth: There was evidence of slower global economic growth in the second half of 2012. Growth in the U.S. continues to be tepid and the expiration of the payroll tax cut will likely serve to weaken consumer spending in the first quarter. Europe is in recession territory. Evidence of a soft landing in China is mounting after growth weakened meaningfully last year. Weaker economic growth will flow through to weaker earnings and top line growth.

These unresolved macro risks will keep the markets susceptible to bouts of volatility throughout 2013. Because of massive government intervention in the global financial markets, we will continue to be susceptible to event risk. As a result, our portfolios are positioned with a relatively neutral stance. Instead of taking a strong position on the direction of the markets, we seek to take advantage of high conviction opportunities and strategies within asset classes.

Notable Numbers

Can You Wait?: An individual that has earned income up to the maximum Social Security wage base each year who then waits to take his/her Social Security retirement benefit until age 70 will receive +77% more income per month than if he/she had taken a retirement benefit early at age 62 (source: Social Security).

Let’s Do It: House Budget Committee Chairman Paul Ryan (R-WI) pledged on 1/23/13 that he will soon release a 10-year plan that would balance the U.S. budget by fiscal year 2023, i.e., the 12 months ending 9/30/2023. The United States last had a surplus in fiscal year 2001 (source: Congress).

What a Disaster: Property losses from worldwide disasters in 2012 (including Hurricane Sandy and the US drought) totaled $200 billion, just over half of the $380 billion of global losses (an all-time record amount) from 2011. The 2012 global total of $200 billion was less than the $210 billion of property losses from the 3/11/11 Japanese earthquake and resulting tsunami (source: Aon Benfield, Munich Reinsurance).

This newsletter is intended to provide opinions and analysis of the general conditions 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 or market segments, 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. This commentary includes statistical information obtained from various 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. Performance data represents general indexes representative of certain asset classes and are not indicative of actual past performance of any specific portfolio managed or sponsored by Brinker Capital.

Appendix

*Returns as of 02/28/13. Annualized for periods greater than one year. Past performance is no guarantee of future results.
Source: FactSet

Glossary

Barclays Capital Municipal Bond Index – A benchmark index that includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than two years) selected from issues larger than $50 million.

Barclays Capital U.S. Aggregate Bond Index – An unmanaged market-value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year.

Barclays Capital U.S. TIPS Index (Treasury Inflation-Protected Securities) –The Barclays U.S. TIPS Index consists of inflation-protection securities issued by the U.S. Treasury.

BofA Merrill Lynch 3-7 Year Municipal Bond Index – The index measures the performance of mutual bonds with maturities between three and seven years.

Conference Board Leading Economic Index –An American economic leading indicator intended to forecast future economic activity. It is calculated by The Conference Board, a non-governmental organization, which determines the value of the index from the values of ten key variables. These variables have historically turned downward before a recession and upward before an expansion.

Consumer Price Index (CPI) –Consumer Price Index is a measure of the cost of goods purchased by average U.S. household. It is calculated by the U.S. government's Bureau of Labor Statistics.

Dow Jones Industrial Average (DJIA) – The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.

Dow Jones/UBS Commodity Index – A rolling commodities index composed of futures contracts on 19 physical commodities traded on U.S. exchanges. The index serves as a liquid and diversified benchmark for the commodities asset class.

Dow Jones U.S. Total Stock Market – The Dow Jones U.S. Total Stock Market Index represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index was created in 1974.

Emerging Markets (EM) – A foreign economy with a low to middle per capita income that is developing in response to the spread of capitalism and has created its own stock market. Analogous to small growth companies, emerging markets have high potential as well as high risk. Such countries constitute approximately 80% of the global population, and represent about 20% of the world's economies.

Exchange Traded Fund (ETF) – A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange.

FTSE EPRA/NAREIT Global Real Estate (Financial Times and London Stock Exchange European Public Real Estate Association/National Association of Real Estate Investment Trusts®) –The FTSE EPRA/NAREIT Global Real Estate Index is designed to represent general trends in eligible listed real estate stocks worldwide. Relevant real estate activities are defined as the ownership, trading and development of income-producing real estate. Only closed-end companies listed on an official stock exchange are included in the index.

Gross Domestic Product (GDP) – GDP is commonly used as an indicator of the economic health of a country, as well as to gauge a country's standard of living.

HFRX Global Hedge Fund Index – The HFRX Global Hedge Fund Index is designed to be representative of the overall composition of the hedge fund universe. It comprises eight strategies: convertible arbitrage, distressed securities, equity hedge, equity market neutral, event driven, macro, merger arbitrage, and relative value arbitrage. The strategies are asset-weighted based on the distribution of assets in the hedge fund industry.

ISM Manufacturing PMI – A monthly index released by the Institute of Supply Management which tracks the amount of manufacturing activity that occurred in the previous month. This data is considered a very important and trusted economic measure. If the index has a value below 50, due to a decrease in activity, it tends to indicate an economic recession, especially if the trend continues over several months. A value substantially above 50 likely indicates a time of economic growth. The values for the index can be between 0 and 100.

ISM Non-Manufacturing PMI – ISM Non-Manufacturing Index is a gauge of business conditions in non-manufacturing industries, based on measures of employment trends, prices and new orders. Though non-manufacturing sectors make up the majority of the economy, the ISM Non-Manufacturing has less market impact because non-manufacturing data tends to be more cyclical and predictable. However, these sectors do account for a considerable portion of CPI. As a result, the figure gives insight into conditions which can impact output growth and inflationary pressures.

MSCI All Country World ex-U.S. (Morgan Stanley Capital International) –The MSCI All Country World Index ex-U.S. is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets, except the U.S. The index consists of 47 country indices comprising 22 developed and 25 emerging market country indices.

MSCI EAFE (Morgan Stanley Capital International Europe, Australasia and Far East) –The MSCI EAFE Index is recognized as the preeminent benchmark in the United States to measure international equity performance. It comprises 21 MSCI country indices, representing the developed markets outside of North America: Europe, Australasia and the Far East.

MSCI Emerging Markets (Morgan Stanley Capital International) –The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. As of June 2006, the MSCI Emerging Markets Index consisted of the following 25 emerging market country indices: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

National Association of Securities Dealers Automated Quotations (NASDAQ) – The NASDAQ Composite Index is a market-capitalization-weighted, unmanaged index that is designed to represent the performance of the National Association of Securities Dealers Quotation System, which includes more than 5,000 stocks traded only over the counter and not on an exchange. The index does not include the reinvestment of dividends.

Real Estate Investment Trust (REIT) A security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages.
Red Rocks Listed Private Equity Index – The Red Rocks Listed Private Equity Index is designed to track the performance of the largest and most liquid publicly traded private equity firms principally invested in the United States and publicly traded private equity portfolios with principal investments in the United States. The publicly traded stocks within the Index are traded on any nationally recognized exchange worldwide.

Russell 1000 – Measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 92% of the total market capitalization of the Russell 3000 Index. As of the latest reconstitution, the average market capitalization was approximately $13.9 billion; the median market capitalization was approximately $4.9 billion. The smallest company in the Index had an approximate market capitalization of $2.0 billion.

Russell 1000 Growth – Measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.

Russell 1000 Value – Measures the performance of Russell 1000 companies with lower price-to-book ratios and forecasted growth values.

Russell 2000 Small Cap – Measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index. As of the latest reconstitution, the average market capitalization was approximately $762.8 million; the median market capitalization was approximately $613.5 million. The largest company in the index had an approximate market capitalization of $2.0 billion and a smallest of $218.4 million.

Russell 2000 Small Cap Growth – Measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values.

Russell 2000 Small Cap Value – Measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.

Russell 2500 – Measures the performance of the 2,500 smallest companies in the Russell 3000 Index.

Russell 2500 Growth – Measures the performance of those Russell 2500 companies with higher price-to-book ratios and higher forecasted growth values.

Russell 2500 Value – Measures the performance of Russell 2500 companies with lower price-to-book ratios and forecasted growth values.

Russell 3000 – This index encompasses the 3,000 largest U.S.-traded stocks, in which the underlying companies are all incorporated in the U.S.

Russell Mid Cap – Measures the performance of the 800 smallest companies in the Russell 1000 Index, which represents approximately 30% of the total market capitalization of the Russell 1000 Index. As of the latest reconstitution, the average market capitalization was approximately $5.3 billion; the median market capitalization was approximately $3.9 billion. The largest company in the index had an approximate market capitalization of $14.9 billion.

Russell Mid Cap Growth – Measures the performance of those Russell Midcap companies with higher price-to-book ratios and higher forecasted growth values. The stocks are also members of the Russell 1000 Growth Index.

Russell Mid Cap Value – Measures the performance of those Russell Midcap companies with lower price-to-book ratios and lower forecasted growth values. The stocks are also members of the Russell 1000 Value Index.

Seasonally Adjusted Annual Rate (SAAR) – Rate adjustment used for economic or business data that attempts to remove the seasonal variation in data. Calculated by dividing the unadjusted annual rate for the month by its seasonality factor and crated an adjusted annual rate for the month.

Standard & Poor's 500 Index (S&P 500) – An index consisting of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large-cap universe. Companies included in the index are selected by the S&P Index Committee, a team of analysts and economists at Standard & Poor's. The S&P 500 is a market-value-weighted index -- each stock's weight in the index is proportionate to its market value.

Standard & Poor’s/Case-Shiller Home Price Index – The S&P/Case-Shiller Home Price Index measures the residential housing market, tracking changes in the value of the residential real estate market in 20 metropolitan regions across the United States. The index uses the repeat sales pricing technique to measure housing markets. The index is calculated monthly and published with a two-month lag.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Brinker Capital.

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Economic News, Outlook & Notable Numbers - April 2013

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