Granite Group Advisors -


2016-01-15 :: 3rd Quarter 2015 Commentary

Looking Back

The 3rd quarter was one of the worst quarters for equities since 2011.  Markets have been frothy since late last year. The fundamentals, combined with China’s weakness and the meltdown in commodities, brought the markets back to a more normalized valuation level.  No markets were spared, but Emerging Markets definitely were hit the hardest due to their concentration in commodities.  Emerging was down a whopping 18.5%, followed by developed international markets down almost 11% and then the US large cap markets down close to 7%.  Within the US, the lower the market cap the worse the performance, with Small Cap being down close to 12%.  The downturn erased all previous year gains and put every market into the red for the year.  Normally in a cycle like this, value would outperform growth. However, this was not the case, as growth in every sector outperformed for both the quarter and year.

Fixed income:  Fixed income yields fell again, pushing most indexes into positive territory for both the quarter and year to date.  

Absolute Return Hedge Fund of Funds Were flat to slightly down in the quarter, but most maintained a slightly positive return for the year.  It behaved as expected and protected the downside. 

Real Estate Was mostly mixed and flat for the quarter, prices are not moving up or down.    

Commodities Continue to suffer to the downside, with economists calling for a global slowdown combined with the strong dollar.


YTD   (Total Return)

Russell 1000  -5.24%  

Mid-cap -5.84%       

Russell 2000 -7.73%

Russell 1000 Value -8.96%     

Mid-cap Value -7.66%     

Russell 2000 Value -10.06%

Russell 1000 Growth   -1.54%    

Mid-cap Growth -4.15%    

Russell 2000 Growth -5.47%

MSCI EAFE  -7.35%       

MSCI Em Mkt -17.18%  

S&P 500   -5.29%

Barclays Aggregate 1.1%

Looking Forward

Equities: Historically speaking, down markets usually end in the early part of October.  We expect this to be the case this year, but we are cautious in the sense that there are still a lot of headwinds coming from the global markets.  Granite Group’s expectation for the rest of the year has not changed; more volatility with a minimal 3-5% upside. China is slowing, but not collapsing and probably doing better than the headlines suggest. We believe the government will help stabilize that market, and bring more calm to Emerging Markets.  Earnings, on a year over year basis, will not be as positive this quarter; but forward guidance could help propel markets a little higher.  Our economy is doing well, but below growth expectations, and should stay that way for quite some time. 4th quarter is generally good for stocks across the board. The S&P came down from the 18 times earnings, and is trading at 16 times 2015 earnings and15 times 2016 earnings, this is not expensive nor cheap and reflects the sluggish growth. If interest rates stay low and slow growth is in the future, we believe a 16 multiple is warranted in 2016.

Fixed income markets:   It is looking more probable that the telegraphed interest rate increase will hold off a bit more and may not even happen this year.  The Fed has withered from its hawkish sentiment, and is taking a different role these days in form of the “Federal Reserve of the World.”  Using global economics as a reason not to raise rates is not the Fed’s role.  However, the lack of inflation gives them an out as to holding off raising rates.  There is now only a 50% chance they will raise by December, so fixed income will be range bound for a while, with higher volatility. At this point, there is no expectation that the longer end of the curve (30 yr treasury) will move up dramatically.  Coupon returns at best, with no appreciation in a more volatile bond market, is our forecast.   

Commercial & Residential Real Estate:  We are not very constructive on housing although there have been some signs of light over the last few years the upside from here is minimal.  It is getting cheaper to buy than rent, so the rental sector which has been one of the bright spots are about to peak as well. Adding in demographics and the reductive lifestyles of baby boomers along with an eventual interest rate rise will slow any housing appreciation. We are still supportive of the following sectors: assisted living and university housing.

Absolute Return Hedge Fund of Funds With a relatively tough quarter behind them, the hedge fund world should rebound here in the 4th quarter, and severely outperform the fixed income markets.  We expect this area to out-perform fixed income for the foreseeable future.

Commodities:  We could see some upside in commodities here in the 4th qtr. Commodities have come down so dramatically that a quick weakness in the US dollar will move the needle. A slowdown in China is not helpful, but it should stabilize enough to not cause a disruption.   

Have a wonderful Holiday filled season!


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