The tale of two tapes: Trick or Treat?

This year has been the tale of two tapes. For those that have exposure to the growth sector, those assets are up significantly this year. For those with exposure to the value sector they are down this year. This will not be forever. Look at the chart below, The NDX, (tech/growth stocks) is up 30%. The Russell 1000 Growth (R1K-Growth) and Russell Small Growth (R2K-Growth) are up 22.1, and 6.3% respectively. While the Russell Large Value (R1K Value) and Russell Small Value (R2K Value) are down 14.5, 19.5 respectively.

As of the 10/29/20 close:

Growth stocks like Amazon, Google, Microsoft , etc…,, have been the place to be while the American workforce hibernated over the past several months. Large value stocks like Chase, AT&T, Chevron, CVS,……. have done horribly this year.  But what will happen when a vaccine occurs, more stimulus is provided  and people become more confident to go back out? We believe the traditional old economy stocks may advance significantly over the next few years for a couple of reasons:

  1. the valuations are somewhat depressed when compared to their growth/tech brethren
  2. People start to turn off the computers and go out , they will utilize more energy, restaurants, amusement parks , vacations, etc…..

The markets predict 6-12 months in advance. What should you do? First, make sure your allocation reflects your needs. (i.e 80% stocks / 20% bonds, etc.)  Look for managers holding stocks that would perform better when the economy turns. This is all predicated on when a vaccine is available and the American public having the confidence to go back out. Granite wants to provide some direction on taking advantage of a return to normalcy. We are not saying it is happening now, but when it does, value stocks will do very well going forward. This is a suggestion of what we believe could happen, and it all depends on if it fits your risk appetite.

If you are retired or getting ready to retire or would just like investment assistance with respect to your account,  please call us at 203-210-7184.  We can be reached directly for one on one help.

Allocation

During the Covid crisis we spent many days having webinars to try to calm people’s nerves about what we saw as the outcome of all recessions and market dislocations. Our advice was to stay the course and continue to add to your retirement funds. As we approach the middle of June the market has almost fully recovered the enormous losses incurred at the beginning of the year. While we made the point that the market is a future predictor and will be recovering ahead of the economy, it is important to recognize that the economy has not recovered yet. This is a good time to reflect on how you felt during this period and if you were comfortable with your portfolio during the crisis. If you were uncomfortable with your portfolio during the crisis then it may be a good time to retake the questionnaire and make sure your portfolio represents your investment comfort. We encourage to login and retake the questionnaire with your company’s credentials here. Please feel free to call us for help.

What should an investor do now?

On Dec 26th for 2019, our blog stated:

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.

That is what was said then, and today we want to give some insight on one way to value the market, and what you can do if you have short term needs or long-term goals:

One way to value the market:

The Price to Earnings Ratio (P/E) is the price the index divided by the earnings. If the price of the S&P index is 10 and the earnings is 1, the P/E is 10. The average over the last ten years is 16.4 times earnings. Before covid and oil issues, the P/E ratio was at a premium of 19.5 times earnings for 2020.  The P/E ratio (as of today) stands at over 22 times 2020 earnings. That means, the markets are more expensive today than they were before covid.

What should an investor do?

For investors with short term needs, college tuition, retirement or other more secure needs: since the market has moved up from the bottom, this could be a good time to secure your short-term needs. Please be sure your allocation meets your needs. This is true for any market condition.

For investors with a longer time horizon than 12 months, look at 2021 earnings. As of  today’s writing, the markets are trading at almost 18x 2021 earnings. That is not expensive or cheap given the amount of stimulus. It will be a slow recovery, but a recovery none the less. On dips, we would increase yearly contributions.

If you are one of our 401k clients, please log on to the educational site to reassess your risk. Use your company password. After you receive the results, be sure to speak with your advisor or click on the “about us” and email Sharlene Kelly for further assistance.

Protecting Your 401K in a Market Downturn?

We Answer Your Biggest Questions

For anyone with money in the stock market the last month has been harrowing to say the least. The S&P 500 has tumbled more than 30% from its high in mid-February, oil prices have cratered, and the coronavirus pandemic threatens to cause economic chaos as businesses large and small shutter operations and furlough employees.

What should you do?

Inevitably there is concern about protecting your 401K and other retirement investments, no matter what your age or stage in life. Here we answer some of your biggest questions right now.

As someone who is three years out or less from retirement, what investments are safest to stay in? What investments should I stay away from?

For investors retiring with three years or less, your overall portfolio should be primarily invested in conservative vehicles such as bonds, hedge fund of funds and conservative stocks. When referring to bonds, think high-quality instead of junk bonds. A true hedge fund of fund, even though it has equities, should have much less risk than the S&P 500. For stocks, large cap dividend-oriented stocks would be the best strategies for general guidance. For more specific retirement plan advice, contact us at (203) 210-7814.

As a young investor, should I be moving my investments in my 401k to mostly bonds?

In the short term, moving money into bonds during uncertain times may be appropriate; however, then the decision will need to be made when to switch back to other investment vehicles. A more important question to address is to ask if investment decisions and allocations are based on your personal needs. Once that is determined, stick with a long-term approach. With a long-term outlook, your contributions are buying at lower prices, which inevitably will rise with a longer-term focus.

As an employer, what advice should I give my employees about how to manage their 401ks during this time?

As history tells us, impulsive decisions during market crises is counter-intuitive to the long-term approach of retirement planning. As an employer, there are many ways you can reassure your employees. They need access to direct advice, guidance and investment education on a regular basis, even more so during a time of stress. An employer should be working hand-in-hand with their financial advisor on frequent communications and ensuring there are a variety of ways to interact. An accessible advisor will help ensure every employee feels comfortable and informed versus scared and reactive.

For the aggressive investor, is this a stock buying opportunity?

If your allocation is weighted heavily in stocks, we would advise that you continue having your contributions go in at this lower pricing point. As the number of coronavirus cases increase, the resulting angst may continue to drive stock prices lower. However, this will not be forever. GGA believes the general indexes will be higher a year from now with the stimulus that has been injected into the market.

Can 401k contributions be temporarily stopped?

Any decision to stop contributions should be taken seriously. While it’s a personal decision, if you can afford it, do not stop. Contributions result in your ability to put tax-deferred dollars towards your retirement. If you want to stop because of the market volatility, an option would be to change your contributions to money markets. That way you are still contributing without taking risk. Just remember to switch your allocations back. All contributions should be based on individual needs to ensure your long-term approach is getting the results you expect.

How often should my allocations change in this type of market?

An allocation established through the Granite Group Advisors’ investment education toolkit should stay in place. History and experience tell us that markets go up and down in the short term, however; over the long-term, markets move up. While it may not happen overnight, remember that your current contributions are buying at lower price points. As the markets recover, that should help your retirement in years to come.

How do we know when the market is bouncing back?

It is very hard to catch a falling knife. One should instead look at forward indicators — one of the best is the Bullish Sentiment. At the moment the ratio is below 40%, which historically indicates investor sentiment is not optimistic at all and suggests one reason to buy. On the other hand, a 60% ratio means investors are extremely optimistic and stocks are likely overbought. We can’t emphasize enough that patience is a virtue in this market.

Given historical crises, how long will it take to reverse losses in my 401k?

In past bear markets, history has told us that the following year is typically an up year. While history has a way of repeating itself, there is no way to guarantee that this is certain. Still, Granite Group Advisors has no reason to believe as of today that it will be different this time. Depending on one’s allocation, time frame and how the markets behave, we expect to see a higher market return a year from now. The main takeaway: the markets will eventually come back and investors should be patient and hold their long-term view to see investment returns.

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

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