Market Unknowns Makes This Downturn a Lot Different From 2009

The difference between the 2008-2009 and today is the catalyst.

It was clear before the markets broke in 2008, that financial firms were leveraged and made loans to people that should have never been allowed to have a loan. It was a known.

The S&P fell about 45% from October 2008 through March 2009. Lehman Brothers, Bear Stearns and other famous Wall Street firms went out of business and many professionals lost their jobs or had their income severely reduced. It wasn’t fun. The government had to get involved, but it was a fixable problem because it was known.

Back then, the visibility on future earnings was taken down to 8 times forward numbers, an occurrence that had not happened since the fall of 1974. We all knew a solution could be devised.

Today, we have an unknown: Covid-19. Many people in the US are contracting it and do not know it. Testing for the virus has thus far not been done in earnest. Famous large events such as the Master’s, St. Patrick’s Day Parade and others have been cancelled. Schools are closed across 26 states and large cities like San Francisco and New York have become ghost towns as local governments follow the guidance of the CDC in implementing stricter social distancing measures.

It’s the uncertainty around this coronavirus that has exacerbated market volatility. Investors simply don’t know when this outbreak will end. Other unknowns are just adding to the mix of trepidation and confusion:

Putin’s fight with the Prince

The dispute has taken oil prices to a point not seen in recent years. For oil companies to survive, the price needs to be higher or risk job losses for thousands of employees. Resolution of this dispute is a big unknown and we would call on President Trump’s administration to serve as referee between the two and get them to play nicely in the sandbox. The fight will drag on S&P earning if a remedy is not found.

Earnings Impact 

The impact of the virus and other market antagonists on earnings is still very much an unknown. The S&P 500 was trading at 19.5 times earnings, slightly expensive considering the U.S. growth rate before the virus and the oil dispute.

Most estimates peg S&P earnings for 2020 in the range of 160 to 165, down from 175. At Granite Group, we’re looking at 157 for 2020. For 2021, estimates have lowered to 175 from 195. Given where the S&P closed on Monday at 2386, that would make for a price-to-earnings ratio slightly more than 15x earnings 2020 and almost 14x earnings for 2021. The long run P/E are 15x, 15.8 and 16.4 for the 30, 20, and 10-year average respectively, no longer expensive if the earnings hold, but not dirt-cheap like in 2009.

What should investors do?

We understand that people are panicked. Cooler heads will prevail. The markets may go lower but the upside a year from now is appealing. Here are steps to take now:

  1. Make sure your allocations between stocks and bonds reflects your cash flow and risk tolerance
  2. In case of a further meltdown, have cash on hand for six months of expenses
  3. Speak with your investment professional
  4. Be prepared for a longer U-shaped recovery. It will be a recovery but not a bounce back

At 2,386, we would leg in slowly and if there is any further down, we would be aggressive to allocate according to your plan.

Concerned about your market moves? Granite Group Advisors can answer questions at any time so give us a call today at (203) 210-7814 and speak to one of our investment professionals.

When it Comes to Investing, Fear is Never Your Friend

An escalating dispute between Saudi Arabia and Russia added oil to the fire of uncertainty around the Covid-19 outbreak, figuratively and literally, causing the markets to overact in an already volatile period.

Yesterday’s rout saw the Dow losing 7.8% in trading and oil prices plummeting 20%. The yield on the U.S. 10-year Treasury also fell to a new record low of 0.38%. 

The fear of the unknown and attempts to price in the economic outcome has taken markets down about 20% from their highs in less than a month. In times like these, cooler heads must prevail and periods of volatility, intense as they are, come standard with the long-term investing process.

There is no indication as yet that the latest coronavirus is here to stay. COVID-19 will see an eventual end, as have other coronaviruses in the past. The level of disruption it will cause over the coming months is still to be determined but as companies reassess their level of exposure to both the coronavirus and supply chain issues in China and implement business continuity plans the markets will adjust and manage expectations accordingly.

If history has taught us anything when it comes to the markets, panic has always been the worst reason to sell.

The bright spot in this volatility could be a return to normalcy for valuations. A price-to-earnings multiple approaching 19.5 simply wasn’t realistic even before the coronavirus fallout, but we felt any type of pullback would have been within acceptable limits. Now, coronavirus coupled with oil could modify our view based on how fast both situations can be resolved. As the markets come down valuations look more attractive making it a better entry point for some investors. While it’s difficult to predict the impact on earnings in the short term, an environment with stagnant or lower earnings for this year, low treasury yields and lower oil prices could be somewhat of a boost to the economy if it results in more disposable income in the pockets of consumers and investors. 

A few firms have lowered their market forecast with expectations that the S&P 500 will end the year between 3,100 and 3,300, down from previous estimates of 3,650. If those targets remain true, there could be nice market upside.

As the markets struggle, GGA will continue to serve as an adviser and guide for our clients during these turbulent times. Our conservative approach is backed by solid investments of the highest quality as we firmly believe that good investments will come back. Bad investments won’t. Concerned about your market moves? Our representatives can answer questions at any time so give us a call today.

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Panic and fear are usually bad drivers for decision making

This week we have seen markets pull back at an incredibly quick pace from their peak on Feb 19th .  Investors need to recognize a few points about the speed of the selloff that is somewhat different than the past.  Obviously, there are risks that are associated with the Coronavirus outbreak that will have a short term effect on the economies of the world, but it is important to take a step back look at some information. For those that think we are at the edge of complete economic collapse, that thought might be a bit over blown.  We have mentioned in a previous blog that according to the CDC, 61,000 US citizens died from the flu two years ago. To put that in perspective, the global death rate from this virus is a few thousand. While all deaths are tragic, the Coronavirus is infinitely smaller when compared to what the US flu causes annually.  Secondly, China has already started seeing a slowdown in new cases and has started to get back to manufacturing and shipping. Coronavirus, according to the experts, will subside as we approach warmer weather. There are reports that 3 different companies are close to having a testable vaccine.  

The S&P 500 is currently at 2,900, which is pretty close to where we were in the middle of October of 2019.  That was right about when investors were notified that a deal had been struck between the US and China signaling an end to the trade war.  In addition, we had not seen a healthy correction in the markets in quite some time, and valuations had gotten a bit overstretched in the first month and a half of this year. Corrections are very typical in all markets and we have not had a meaningful one since the 4th quarter of 2018.  If one had invested in the markets over the last decade, one would have seen this kind of sell off at least 10 times if not more.  Yet this one, because it is associated with the unknown of a disease, has caused the media to panic the population in a way  that we have not seen since the 2008 financial crisis.  While this is disheartening, it is important to know that this will pass and we will recover and move forward. 

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Coronavirus update

While the action of the markets and the news over the last few days seems somewhat frightening, here is our take for your consideration.  The markets were at a peak on Feb 19th and had shaken off the news of the Coronavirus. Most of damage is abroad as the outbreak will cause a temporary dislocation in the economic systems of many countries.  At this time, China is just starting to move forward, and the US seems to be well insulated, as we have not had any deaths yet.   GGA believes this current will be temporary, but it will impact global GDP.  At this time, the US economy is in good shape but US companies receiving earnings from the affected areas will have a short-term earnings hiccup.  Markets are generally good predictors of the future.  At some point when markets calm down, we will re-enter a growth phase, and whether that recovery is V shaped or U shaped,  economic activity will resume.

After today’s action, the S&P will be down a few percentage points for the year, so it isn’t time to panic.  You can be prudent and take opportunity where it lies, and that means an entry point into the market at much lower prices than last week.  This will take some time to work out, but to put this into perspective: the 4th quarter of 2018 was much worse in terms of market action than what we are seeing at this moment.    Please feel free to call and discuss if you are concerned in any way!!!

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Coronavirus

While news about the Coronavirus may seem unsettling and somewhat frightening, it is not the end of the world.  Outbreaks like this have happened before and will happen again, they usually last a few months. To provide some perspective, US influenza in 2018-2019 season resulted in roughly 34,000 deaths and in 2017-2018 there were 61,000 associated deaths.* Even with those statistics, the market hit new highs.  We don’t want to make light of over 200 deaths in China, but as a percentage, it is infinitely smaller than the US.  Do we think it will definitely cause a slow-down, yes, as many business are temporarily shutting down.  

Our perspective: the far east will suffer the most from this event in the short term which in turn will cause a less robust GDP growth for the countries most affected by the outbreak.  While this is still developing, there is no reason to panic as China is attempting to control the outbreak.  If it is prolonged, the GDP will suffer a bit more; if short term, the economic impact will be minimal. As with everything else in life, this too shall pass.  With that being said, if our markets take a downturn from this event, it will only serve as a nice buying opportunity in the equity markets.

As always, please feel free to call Granite Group Advisors at 203-210-7814.

*Data from CDC site.

Granite Group Advisors is a private investment advocate for families, foundations and pensions. We are also a 3(38) Investment Fiduciary providing managed models with investment education to make retirement plans simple.

Happy New Year!

Last December, after the market experienced a severe drop, Granite Group Advisors sent out a note to buy the market. Not because we are market timers, but simply because the sell off made the market’s valuation relatively inexpensive. Our optimistic outlook of 20%+ greater returns proved to be conservative. The S&P 500 is now up 37% since that note.

What’s happening? We have stated for years that it is important to remember that politics do not matter as much as keeping a keen eye on policy from the executive branch and the FED. The US has experienced impeachment , trade wars, North Korea and political upheaval and with all that, the markets are hitting new highs! Granite Group believes, by the Fed keeping rates low and with a decent economy, the general market indexes are fully valued based on historical metrics.

It’s not the price of the market, it’s the valuation of the market. The markets are the greatest predictors of future economic growth. Sometimes the markets get too enthusiastic. Granite Group believes that the 2020 returns will not be as robust. If you are retiring or in need of funds, please make sure your allocation reflects your risk and needs.

For more detailed conversation on understanding how GGA performs manager due diligence, personal allocation process or general discussion on the difference between a consultant and advisor, please call us directly at 203-210-7814

Impeachment?

The markets love certainty, and when uncertainty  arises, the markets become nervous. With House Speaker Nancy Pelosi formally looking into the impeachment process, the markets worry. Even though there could be a short term stock market impact from these actions, as we have written several times, politics do not matter when it comes to the long run performance of the stock market. On a valuation perspective the markets are not historically considered cheap, at almost 18 times this year earnings and almost 17 times next year earnings. In the short term, we would not favor allocating to equities at this valuation level, however the US economy is relatively stable, so if there is any major pull back, that would present a buying opportunity in certain sectors.

We welcome your comments and inquires at 203-210-7814

 

The Tariff Show

We have recently indicated that the market had reached short term highs, and it is apparent now that the market is starting to price in a full out trade war.  This is a difficult task in general, as the cost of the tariffs are difficult to price into stocks. However, what is clear is that companies affected by the tariffs are warning Wall Street in their comments during earnings calls.  In the short term we will see volatility, and that should continue for a while.  We do not see a major downturn at this time, and just to put things into perspective: the S&P 500 is up close to 13% for the year as of this writing.  This period may be a bit bumpy but it is not a bear market.

Short term liquidity needs?

During Christmas season of 2018, investors were seemingly panicked and selling. Some of our private clients were calling and asking to sell equities from their portfolios.  At that time, the S&P 500 valuations had become relatively low, to the point where we were suggesting that this moment was a good time to buy.  Granite Group sent out a blog in the hopes of sharing our opinion and instilling  confidence that the markets were not going to collapse. Our perspective was that we could get as much as a 20% rebound to the upside from the Christmas lows.

We also know that there are periods of time when the markets are fairly valued.  Today, we write for people who might have short term needs.  At this stage, until we see the next batch of earnings and growth, our perspective is that the market is fairly valued. This might be a good point to raise some cash to help pay for short term needs, like college tuition, general expenses or expected retirement. In general, If you have short term liquidity needs, we encourage you to look at your allocation to make sure it reflects not only your personal risk, but your personal needs. If you need help, please call us at (203) 210-7814.

Short Term Pain, Long Term Gain

We have been cautious for most of the year, but with the enormous amount of volatility combined with the market sell off during the 4th quarter, we want to clarify our targets for the S&P 500. We already had lower targets on the S&P than other firms, with an expectation of low to moderate single digit returns for 2018. We have stated that the S&P should have a slightly lower multiple (15 -16 times earnings, instead of the 17-18 times earnings over the past couple of years) based on the theory of a higher interest rate environment. So to make it clear, here are ranges that the S&P should trade in for 2019 and 2020 based on projected earnings:

2019              2670 – 2848

2020              2900 – 3100

If we take the low end for each year, we are looking at roughly 6% higher from today’s market action in 2019 and about 16% higher for 2020. In addition we would suggest bond yields will stabilize and if and when the 10yr yield goes back above 3%, it will be a good entry point to get back into the bond market.

Market psychology usually overshoots in both directions and while there is no easy way to determine a market high or bottom. Baron Rothschild has said, “the time to buy is when there’s blood in the streets.”  This just might prove to be true when we look back in a year or two from now.

 

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