Granite Group Advisors -

NEWS

2015-09-10 :: 2nd Quarter 2015 Commentary

Looking Back

The 2nd quarter was mostly a repeat of the first quarter, except that it ended relatively flat on the Large Cap Equities. As we had predicted, volatility was abundant in every area of the market.  Gains were erased and then recouped.  When it was all said and done we are just about where we were when we started.  There was some interesting divergence in the quarter, whereas Mid-Caps actually were down across the board and Small caps specifically small growth had a good quarter.  Growth is outperforming value at quite a good clip this year thanks to the P/E expansion. Non US markets were slightly down in both developed and emerging markets.   Most of this was caused by external issues rather than market forces, such as the Greek debt crisis.

Fixed income:  As rates rose, prices fell leaving the benchmark negative for the year erasing all the gains in the previous quarter.

Absolute Return Hedge Fund of Funds had another quarter of positive returns and is now outpacing fixed income by roughly 5% this year. 

Real Estate picked up a bit in the second quarter but year over year prices have still not moved up in any dramatic fashion.  

Commodities did move up a bit from some of the big lows earlier this year, however the strength of the dollar will keep this sector muted, unless we get some serious growth in the world.

 

YTD   (Total Return)

    

Russell 1000  1.71%              Mid-cap 2.35%                 Russell 2000 4.75%

Russell 1000 Value -0.61%     Mid-cap Value 0.41%         Russell 2000 Value 0.76%

Russell 1000 Growth   3.96%  Mid-cap Growth 4.18%        Russell 2000 Growth 8.74%

MSCI EAFE  3.81%               MSCI Emer Mkt 1.67%      S&P 500   1.23%

Barclays Aggregate -0.10%

 

Looking Forward    

Equities: Granite Group’s expectation for the rest of the year has not changed; more volatility with a minimal 3-5% upside. The high P/E’s on the market make it difficult to see much more upside, especially with the Fed expectation of a rate hike later in the year.  Earnings, as well as growth, will have to come in much better than expected for a bigger upside. Granite Group does not see that happening especially with the strong dollar hurting exports and multinational earnings. We believe better returns will come from outside the US, in Europe and Japan, and some of the BRIC countries. Those countries are stimulating their economies which will weaken their currencies and help increase their export economy.  The expectation for 2nd quarter GDP is in the mid 2% range and is expected to get a little better in the remaining quarters of the year.  As we have stated before, we are in a transition year for equities as markets have been pushed to the high end of the P/E scale.  Going forward, we still see the markets maintaining its higher volatility profile with slight positive returns.      

Fixed income markets:   We will see the Fed raise rates on short term borrowing this year. Whether it happens in September or later does not really matter so much as the direction of higher rates to come.  The Fed will most likely take it very slow and not do what many Feds have done in the past where rates were raised every quarter.  This will make for slow grind higher rates over the next couple of years. Longer term rates will remain in a range for most of that time.   

Commercial & Residential Real Estate:  The Real Estate market has rebounded a bit from the weak first quarter, but we don’t see a big upside in housing due to demographics.  As far as commercial real estate there will be some areas of growth but retail will continue to suffer as brick and mortar are not as important as they used to be.  The strength of the dollar has made most of the international buyers take a breather from investing in the US. We are still supportive of the following sectors: assisted living, University housing, and rental property for investors seeking a real estate allocation.

Absolute Return Hedge Fund of Funds We continue to believe that absolute return hedge fund of funds will outperform the fixed income sector.  This has played out as we had predicted and will continue for the foreseeable future. These funds are designed to take roughly the same amount of volatility as fixed income; therefore it is a good way to exit out of fixed income allocations without adding volatility to the overall portfolio.  We expect this to continue for years to come.

Commodities:  Unless the US dollar gets weaker in the upcoming months, we are not expecting much of a rebound from the precipitous drop we have recently seen in commodities. A slowdown in growth from China is not supportive of this sector either. We do expect to be a bit higher by year end; but if the current environment persists it will be a very moderate to low upside.   

 

Have a wonderful Summer!

 

 

 


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