Everyone is all Trumped up!

In the past, we have mentioned that investors should not focus on politics when it comes to the markets. Presidential decisions have very short term emotional impacts on the market. The best example is that investors were told to sell stocks if Trump was elected. Many people did this, and are now very sorry. We constantly need to be reminded that the Fed, market fundamentals and economic growth will dictate the long-term stock market outlook, and not the President.

As posted in our December 12th blog, (and the market has appreciated almost “0” from the high), Granite Group still believes there is limited upside in the short-term. We would wait for a better entry point. We are still confident in the long-term.

You can follow Granite Group Advisors on LinkedIn and learn more about our Wealth Management and Corporate Retirement Services on our Website.

Market Color

The Gross Domestic Product (GDP) is a measurement of the output of the US Economy. Sixty Six percent (66%) of the growth of GDP is based on the amount we spend as consumers. Two thirds of that spending comes from disposable income (how much extra money we have after we meet our required expenses). Higher interest rates and higher oil prices will generally lower the amount of disposable income we have, unless it is offset by higher wages.

The market is currently trading at 17 times 2017 earnings, which is much higher than the long term average of 15 times earnings.  If higher oil prices and higher interest rates persist it will most likely affect most Americans excess income.  With the current market valuation trading at premium, this leads us to believe that there is limited upside in the short term return for equities; and we should expect a slight pull back.  There is a caveat to this analysis and that is the Trump economic agenda.

If President elect Trump can push his agenda of lower taxes, reduced regulations, and repatriation of US corporate earnings held overseas, then earnings could potentially move higher than is currently predicted for 2017.

You can follow Granite Group Advisors on LinkedIn and learn more about our Wealth Management and Corporate Retirement Services on our Website.

We are full

We hope you had a great Thanksgiving with family and friends! Like us, we hope you are stuffed, as we believe the S&P valuations are as well.

We sent an email to private and retirement plan clients on the Wednesday morning after the election.  It was titled “Don’t Panic” and outlined the reasons for a buying opportunity. The Trump-effect of new stimulus has taken the S&P 500 to new highs. Pragmatically, all the Trump policies would not come into play for a while. At almost 17 times 2017 forward earnings with the long run average of 15, this would suggest the markets are stuffed.  A pull back of greater than 5% would be viewed as a better entry point.

Please feel free to call us at (203)210-7814 with any questions.

Pre-election jitters…

Since our July blog we have been cautious on the market. The market has moved down about 3-4% since the end of July. The elections have everyone spooked. The markets hate uncertainty.  The Trump presidency is perceived as such uncertainty, whereas a Clinton presidency is seen as the devil you know. Here is the secret: the Fed is in charge and not a President or a Presidential election. An election’s effect on the markets is only in the short term. There are only two Presidents that we are aware of, that have affected our GDP due to their policies; but that is for another discussion.

If Donald wins, the markets expect a sell off, and if Hillary wins a mild positive reaction is expected. Of course, these are very short term, knee jerk reactions. While this might seem concerning, we would get ready to buy on a significant move to downside. Here’s why: market valuations have gone from expensive to fairly valued, so we believe that any sharp selloff would be a good time to add to positions.

Here are some good reasons:

  • ISM and PMI have been positive
  • Rates are staying low ( range of 1.9-2% 10yr is still low, currently 1.83)
  • Demographics will start turning to consumption within a few years as millennials and echo boom kids begin buying stuff
  • There is a lot of cash on the sideline

We are not saying buy today. We are saying that if there is a big sell off, it would present a more reasonable entry point. We are currently at 15.8 times 2017 earnings.

Good luck, call us with questions.

It’s all about employment

It’s all about employment. The market is extremely focused on this Friday’s payroll numbers. This focus is on the payroll because it will dictate what the Fed should do with interest rates.  This week, the 10yr treasury yield climbed from 1.53% to 1.68%, meaning the markets think the Fed is finally ready to raise rates. Some market pundits are calling for a yield of 2% on the 10yr treasury by year end, however we do not see it happening that quickly.  If the numbers come in stronger than expected, it will likely cause the Fed to raise rates by the end of the year. This would clearly be a negative for bond holders, and should put downward pressure on stock prices. If the numbers do not exceed expectations, then the artificially low 10yr treasury yield will most likely trade in a narrow range. In either case, the valuations are full.

Rumors…

Our latest post was on July 28th , and our convictions have not changed. The market is still ahead of itself.   So why should you hear from us today? Because of the market rumors about Deutsche Bank’s credit lines.  Whether the rumors are true or not, they are impacting the equity markets today. If true, we do not expect another Bear Stearns-like selloff.  A selloff will still hurt, but most other banks are much healthier today than in 2008.

If there is a 5-10% or greater selloff due to a DB related incident, we would think that would present a buying opportunity. Be patient, be prudent. We shall see………………………Call us with questions

Nowhere else to go? Or is there?

We haven’t posted in a while, because we wanted to let the market run. The Fed induced a low 10yr yield; investor attitude is “there is nowhere else go”  and the S&P valuations are too high for our comfort.

Having no other option is not a fundamental, but an artificial reason to invest. We would be cautious with putting new money to work until a better entry point presents itself. We want to be clear that we are not calling for a correction, but we think the market is ahead of itself. Either the earnings catch up to the market or the market catches up to the earnings. We think the later.

You can follow Granite Group Advisors on LinkedIn and learn more about our Wealth Management and Corporate Retirement Services on our Website.

The U.K. leaves

Overnight the U.K voted to leave the European Union. The so called Brexit vote has sent equity markets into complete turmoil as investors around the world are trying to reprice risk. It is important to not panic as although this is a shock this is not the end of the world.

The exit itself will take time to work through and central bankers around the world are taking measures to protect liquidity and stabilize markets. The longer term risk is the complete unwinding of the European Union. As we travel through all this uncertainty it is important to remain calm and look for opportunities rather than being fearful.

Low yields

The 10 yr treasury yield has been going lower this week with a low hit this morning of 1.63%. There are many factors contributing to the drop in yields. One major factor is  that most long term government bond yields around the globe are trading with negative yields, which  makes our current yield of 1.63% very attractive.  The fed seems to be ready to raise rates so this phenomena may seem a bit odd, because normally interest rates go up when the fed raises rates.  We believe that these conditions will eventually come to pass but lower yields for longer seem to be the rue of the day.

One area that may help push yields higher in the coming years is inflation.  With the increase in labor costs, we should see an increase in inflation albeit at a moderate amount.  Presently, labor costs are surpassing expectations and this should put enough pressure on the Fed to raise interest rates. If that scenario persists, we will eventually see bond prices fall and yields going back up. If you are a risk averse investor and currently have a portfolio of bonds we would suggest staying the course; however, if you are invested in a bond mutual fund it might be time to consider reducing your position.

The Sohn Conference

Yesterday we attended the Sohn Conference. The foundation was started in memory of Ira Sohn who passed away from cancer years ago. The organization has contributed over $65 million to cancer research. Many of the speakers are legendary hedge fund managers. They include the likes of David Einhorn, Jeffrey Gundlach, Stanley Druckenmiller and many more. It is considered one of the top investment conferences in the world.
Every year the conference brings together top ideas from general equity and fixed income views. They are smart, enthusiastic and more right than wrong. Every year they were excited, last year there was body language that was neither bullish or bearish. This year we noticed a big difference, they were negative. Gundlach was still espousing how the fed cannot afford to raise rates with lower GDP forecasts. Druckenmiller was downright bearish with his best pick being gold. Unlike last year, where complacency made us nervous, this year, they spooked us.
Granite Group still believes the stock markets to be overvalued in the short term. Will they be higher next year, we believe so, but not by much. Will interest rates be higher next year, yes, but not by much. So what to do? We are looking for a catalyst to take the market one way or another, but in the meantime, be patient. Wait for weakness in equity markets to add to positions and strength in yields before adding to bond positions.
As always please feel free to call us directly with questions.

%d bloggers like this: