Granite Group Advisors -


2014-01-24 :: Fourth Quarter Commentary, 2013

Looking Back

2013 was one of the best years for equities in a long time.  It seemed that good news was good news and bad news was good news. Optimism prevailed, as money flowed from bonds to equities, marking all-time highs. Small Cap markets led the way with no losers in US equities.  The non-US markets did pick up: ending the year up almost 20% in developed markets, but not enough in Emerging Markets, to push it into positive territory for the year.     

Fixed income:  Did not perform well as the threat of tapering by the feds pushed yields more than 1% higher, and that means prices drop. The Barclays Agg. was down 2.02 %.  This was expected as the cycle of higher interest rates is in the future.

Absolute return hedge funds out performed fixed income, as Granite Group had predicted in our previous commentaries. This is a welcome change. The index was up roughly 8 %.
Real Estate:  Housing prices moved higher in 2013 as the economy recovers from the great recession. 
Commodities:  Gold, metals and other commodities were generally weak in 2013.

2013 YTD   (Total Return)
Russell 1000  33.11%                 Mid-cap 34.76%                 Russell 2000 38.82%
Russell 1000 Value 32.53%       Mid-cap Value 33.46%        Russell 2000 Value 34.52%
Russell 1000 Grth   33.48%       Mid-cap Growth 35.74%      Russell 2000 Growth 43.30%
MSCI EAFE  19.43%                 MSCI Emer Mkt -4.98%       S&P 500   31.9%


Looking Forward    

Equities: With such an enormous rise in equities in 2013, markets are a bit ahead in the short term of where they should be. Therefore, we are calling for a relatively temperate year in equities.  We expect single digit returns for 2014. There are two things that will either help or hurt the equity market.  The first is that the economy is healing, and if sustained without any stumble, we could get slightly better numbers than expected.  The second: We expect ten year to climb to approximately 3.5% which might have a slight effect on housing and car purchases.  If interest rates move higher than expected, this could create some dislocation in many areas, but we do not see a 4% ten year anytime soon.  Add in the fed tapering off the bond buying program and government involvement, and these too could affect equities. After all the political jawboning, as an earnings outlook, we see 1900’s for the S&P. That is not a lot of upside and it is below the street consensus.

Fixed income markets:  Will most likely continue to trade lower and yields will move up further as we continue the higher interest rate cycle. The 3% yield on the 10 year treasury might be the low for 2014, with some exceptions for safety in any major pullback in stocks.  This is expected and will continue for some time.  Therefore, we are expecting another slightly negative year for most debt sectors. Short duration bonds and moderate duration bonds will do the best.

Commercial & Residential Real Estate:  The housing data was surprisingly good in 2013 but the higher interest rate cycle could slow further price appreciation.  We believe prices will stay stable and but nothing dramatic to the upside. 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 fund of 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:  Coming off one of the poorer years in commodities, we should expect a bit of a reversal during 2014, assuming economic growth accelerates.  The trend should be higher, but nothing dramatic, as China has the biggest impact. There is a race to the bottom when it comes to currency valuation as the US continues to print money. The US dollar is still the reserve currency of the world, but this could change a bit as the world starts to access other currencies.  This would be especially good for Gold and Oil.

Happy Winter!

Granite Group Advisors

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