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

It’s about the economy, not politics

Even among the political tensions last week, all three major U.S. stock indices were up! In the past, we have said to follow the Fed and the economy, because political actions usually have short-term, knee jerk reactions on the markets.  Considering all the news about Syria, and Trumps legal situation, the S&P rose 2%, the Dow rose 1.8% and the Nasdaq increased 2.8%.

With the market trading at just above the historical average of 15 times 2019 earnings, we still believe that the market can achieve mid-single digit returns for 2018 due to the fact that earnings are expected to rise 18% during the year.  We also believe investors should diversify their equity holdings within specifics:  emerging markets and international market sectors, as they are relatively cheaper on a P/E basis than their US constituents.

Trade Wars

The banter of a trade war between the US and China has taken the stock market down again. As of this writing, the futures are down big. At this point the so called “trade war” is just talk, but when the dust settles we believe there will be a nominal impact to GDP for either country. In fact, negotiations may surprise investors with a positive outcome.

We would caution investors not to panic. The market is trading at approximately 15 times 2019 earnings which is not excessive. The long run average is around 15 times earnings. Even with slightly expected higher interest rates (10 year treasury), the market should be around 16 times earnings because of earnings growth.

We still see upside in the markets! Even though the markets are down on the year, Granite Group is sticking with mid to high single digit return for 2018. We also believe investors should have healthy exposure to Europe and Emerging markets.

Please feel free to call us with any questions.

What a day!

The Dow was down 4.6% or over 1100 points! This was the largest point loss in history, but does not rank in the top 20 as a percentage loss.

The question is when to buy or add? We alluded in our Friday’s blog, that any further pull-back from last week’s turmoil would present an opportunity. We still believe that to be true. As of Feb. 5, 2018 close, the S&P is trading at 17 times 2018 earnings and 15.4 times 2019 First Call earnings. The average P/E ratio is historically around 15. We are still trading at a premium to 2018 earnings, but are no longer trading at a premium to 2019 earnings. We believe a slight premium is justified given the current global economic backdrop. We would start dipping the toe into the US markets, we also think emerging and international markets deserve more attention than the US markets, as those markets can potentially have more upside over the next few years.

As for bonds, the 10 year yield had a huge sell-off today, going from 2.85 to 2.71. We have and will continue to believe that bonds are not a good place for investors seeking total return for a couple of years. This would present an opportunity, if appropriate for the investor, to reallocate to other classes that afford similar volatility.

We encourage you to call us with any questions at 203-210-7814.

You got to know when to hold ’em

In the last couple of days the 10 year treasury yield sold off rather dramatically, finally reaching a yield of 2.85 today.   While many were expecting longer rates to rise gradually, the pace of this move has spooked bond and equity investors.  Here is the good news: the economy is doing well and all indications point to continued growth. Job growth is steady and strong and wage increases have risen at the fastest year over year growth of 2.9% since 2008.  All that should alleviate any true panic.  However, markets are overvalued and a healthy pullback is positive.  What is important to focus on?  There is no sign of recession and one week’s market action should not deter investors from long-term goals. We believe, if there is an additional downside after this week, it could be a better point to add capital.

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

Has the market rally finally run out of steam?

Markets have recently reached new highs.  This is making investors reasonably cautious, since we are about to enter the traditionally weakest time of the year.  It is generally thought that October is a bad month for equities; however it really is September when markets have gone awry historically. There is only one month in the history of the S&P that has averaged a negative return since 1926:  September.  While September could potentially be tough, this year the market does appear to have some good legs, as corporate earnings have rebounded.  The more recent weakness in the US dollar is also a big help to the multinationals in the US.  We believe the markets will have a dip, and if anything comes out of the federal government  (such as tax relief), this could help sustain an expensive S&P valuation.

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

The Higher Market Grind

Our last writing was on March 6th, titled Life’s Lessons. The reason is, there is not too much to do in the short term.  We intimated that pundits have become too bullish and that gave us pause. The markets sold off and then moved back up which means we need a catalyst to move markets higher or lower.  As of this writing, FactSet says the S&P price return is up 117 bps or about 1.17 percent since March 6. Also, according to FactSet, the S&P is trading 18.3 times 2017 and 16.4 times 2018 earnings.

Why is this important?

We believe the markets are slightly expensive given the current valuations. The combination of expected growth, higher interest rates and high valuations dictate that we should be patient. We caution on making new allocations to the equity markets at this junction. We do not believe a bear market sell off is imminent, but some bad news can certainly cause a retracement.  Considering all of these factors, we think it is prudent for investments to be added at a better market valuation.

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

Life’s Lessons

Years ago I was managing money at DLJ. In 1999, when I was in my early to mid-thirties, I felt that I did not understand valuations. So, I fired myself and hired independent managers to replace me for my clients. The reality was that I was influenced by the dotcom hype and my judgement became skewed. This was fortuitous as many of the tech holdings were sold in February of 2000 and I launched myself into the consulting business of finding managers with process.

Fast forward to 2008, Granite Group was 4 years old, the market was moving up and one of our prestigious Wall Street clients called to change his allocation to more equities. He was a very conservative gentlemen, who’s returns were very good, but wanted to be in more aggressive asset classes. We told him that it was not a good idea because of valuations and that it did not fit his risk profile. We reluctantly agreed and of course the markets moved down 40% in short order.

Today with the market valuations moving up, many people are calling to change allocations, but in addition want more aggressive managers. It is not just one or two, but many. Sound familiar? Markets historically run 7-8 year cycles and they run hot and sometimes they are stone cold. With high valuations (not market price) and many clients calling to be much more aggressive than normal, it tends to give us pause to reflect on life’s lessons: have an investment and allocation process and stick to it.

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

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.

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