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.

 

Now that the Mid-terms are over what comes next?

As we have always stated, politics don’t really matter, policy is what matters and that turns our attention back to the federal Reserve and trade issues. The futures this morning are pointing higher.  So what gives?

It has always been the case that Wall Street is very comfortable with Washington gridlock meaning nothing changes, which gives Wall Street some degree of certainty. Pundits and investors alike anticipate that the economy will not be getting too much policy support from Washington. This will put less pressure on the Federal Reserve to raise interest rates, making money cheaper for longer, which is good for stocks.  

As for the big picture the economy is strong, interest rates are still historically low and we are entering a period of historically good equity performance. The markets always look in advance by about 6-9 months. The S&P is trading at 2755 and Granite believes a little more upside is in store for the rest of this year as well as some decent upside in 2019.

 

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

 

Entry Point

The markets long run price earnings ratio is about 15. The market is trading at about 13.7 times 2019 earnings. Earnings are strong and rates staying relatively low, Granite Group believes today would be a much better entry point.

Interest rates have gone up, now what?

interest rates

In 2017 , Granite Group wrote several pieces on the effect of higher interest rates on bonds. Investors have just witnessed the third interest rate hike in 2018. Granite Group continues to encourage investors who hold bond mutual funds or bond ETF’s to be cautious. We do not expect the same percentage back up in rates going forward, but do believe rates will go slightly higher over the next 12 months.

What does this mean for the investor?

Granite Group proactively shortened durations and modified allocations last year and this year to protect client’s fixed income allocations. As higher yields become more compelling, we still believe there is slightly more to come.  It is important for investors not to stray from their fixed income allocations, but be diligent of how one invests within allocation. To lessen the impact, for those who desire income, it will be appropriate to have shorter durations. For those who are conservative but do not need income, there are several other low volatility options as interest rates go up.

As rates increase into 2019, we encourage investors desiring fixed income (bond) exposure to dip their toe in the water when the 10 year treasury yield goes higher next year.

Please feel free call Granite Group with any questions. (203) 210-7814

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