Granite Group Advisors -


2013-11-06 :: Third Quarter Commentary, 2013

Looking Back

The 3rd quarter of 2013 was another good one for the U.S. Equity markets, although the end of the quarter showed a bit of a pullback. Growth was the big winner in the quarter as it had underperformed all year and then came into parity with value. The non-US markets did pick up during the quarter with the developed markets outperforming the US, but still well below the US averages for the year. Emerging markets also picked up but not enough to erase the negative return for the year.

Fixed income: Had a better quarter than the previous two, but it is still negative on the year, and most likely will not get positive by the end of the year.

Absolute return hedge funds out performed fixed income again, as we had predicted in our previous commentaries. This is a welcome change

Real Estate: Housing prices sputtered a bit during the quarter, but it is still the brightest spot in the economy. However, there is still a long way to go.

Commodities: Gold, metals and other commodities are generally weak. The US dollar rally started reversing and that helped out gold.

2013 YTD (Total Return)

Russell 1000 20.76%
Mid-cap 24.34%     Russell 2000 27.69%
Russell 1000 Value 20.47%     Mid-cap Value 22.94%     Russell 2000 Value 23.07%
Russell 1000 Grth 20.87%         Mid-cap Growth 25.42% Russell 2000 Growth 32.47%
MSCI EAFE 13.36%         MSCI Emer Mkt -6.42%         S&P 500 18.85%

Looking Forward

Equities: With the beginning of the new quarter, the headwinds expected have arrived. The government is on shutdown due to the budget and the debt ceiling fights. While we believe these problems will eventually be solved, there will be damage to the economy. The largest segment affected will be all the federal workers furloughed. Spending will be impacted as it accounts for approximately 2/3rds of our GDP. Unfortunately, the acceleration of growth expected will most likely not be there for quite some time. Our expectation is the US will still grow, but well below the 3% historical rate. This will probably keep the feds from tapering until December at the earliest, which will be good for the markets in the short term. More important is the earnings for this quarter. Markets trade on valuations, and for the most part, we are fairly valued. A good set of earnings will allow the stock market to expand. We expect more volatility but this too shall pass. Once the noise dissipates, Granite Group expects the equity markets to surpass previous highs.

Fixed income markets: Will trade in a range for the foreseeable future. The 1% move up in yields has priced in the Fed tapering. The 3% yield on the 10 year treasury might be the high for a while. In the short term, yields will move back down and prices up. We feel it is prudent to keep bond portfolios diversified so that any move up in yields will have a minimal effect on price. Short duration, moderate duration, investment grade corporates, agency debt combined with emerging market bonds and developed market debt will help balance out the risk.

Commercial & Residential Real Estate: The housing data sputtered a bit in the 3rd quarter as we end the main part of selling season. This combined with the increase in mortgage rates will definitely keep us subdued in this sector. Prices have come up from depressed levels but we are still well behind the 2006 highs. Starts are still well below the highs of years ago and we do not see a big change in building going forward. The presence of speculation in the space is showing itself again especially in the states where markets collapsed. We still see brick and mortar retail having a tough time, and multiple unit rental properties being the better place to invest, however this market is starting to top out as well.

Absolute return hedge funds have outperformed debt this year by a significant margin and this should continue for quite some time. If you don’t need the income, then this will be a better place to be, to remove volatility from the equity markets while still getting a decent return.

Commodities: Will continue to struggle and mostly trade in ranges. The best hope for this sector is the weakening of the US dollar. A weak US dollar usually translates to higher commodity prices and with the shutdown and the debt ceiling problems combined with the fed printing, we should continue to see that happen for the rest of the year.

Have a Happy Autumn!!!!

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