Granite Group Advisors -


2013-05-09 :: 1st Quarter Commentary, 2013

Looking Back

The 1st quarter of 2013 was excellent for the U.S. Equity markets, even with the headwinds of increasing US debt, year-end tax expiration, sequester and many more. The non-US markets did not fare as well: developed markets put in a 4+% return and Emerging Markets actually came in negative for the quarter.  Much of this out-performance came due to the strength of the U.S. dollar during the Cypriots’ crisis a few short weeks ago. 

Fixed income:  Had a very weak 1st quarter.  We appear to be at the edge of yields moving to more fundamental valuation. Some sectors saw slightly positive returns but the outperformance for the last few years is clearly over.

Absolute return hedge funds out performed fixed income as we had predicted in our previous commentary. This has not happened for many years. Fixed income is near generational lows. 
Real Estate:  Housing, as well as general real estate, has certainly improved from the doom of the last 5 years.  Prices have moved up as well as the fundamentals of building and construction.  Some of this could be noise from the Sandy rebuilding, but regardless of Sandy, the markets have certainly stabilized.
Commodities:  Gold, metals and energy were generally weak so far this year; however once the Cyprus crisis started, gold bounced back a bit.  Oil prices have sustained themselves at the higher end of pricing and this could become a problem as we enter into the summer months where oil generally moves even higher.

2013 YTD   (Total Return)
Russell 1000  10.96%  
Mid-cap 12.96%         Russell 2000 12.39%
Russell 1000 Value 12.31%       Mid-cap Value 14.21%       Russell 2000 Value 11.63%
Russell 1000 Growth 9.54%      Mid-cap Growth 11.51%      Russell 2000 Growth 13.21%
MSCI EAFE  4.38%         MSCI Emer Mkt -1.92%    S&P 500   10.61%


Looking Forward    

Equities: Our moderate long term view on the equity markets continues:  slower historical growth and decent returns for the foreseeable future.  At the beginning of the year we anticipated the market being up 8% for 2013 based on slow growth and a discount to historical valuations. For the first time in 10 years, we are changing our year end forecast during the year for the S&P to be up 12-14%. Even though we believe growth will be hampered by US government debt and other headwinds, we are having slightly more growth than expected.  Therefore, assigning a lesser discount to historical valuations.  No market goes straight up, and technically we are overdue for a pullback, but fundamentally the markets are not expensive and could be considered cheap based on 2014 earnings forecasts. The reality is: our economy is growing but it is historically slow.  The Fed continues to stimulate by punishing savers and those wanting less volatile investments.  Eventually, the US debt concerns will come home to roost, but the old adage is “Don’t fight the Fed” and that is the most accurate point of view in today’s markets.

Fixed income markets:  As we mentioned in last quarter’s commentary, the days of outsized fixed income returns are over and the first quarter proved that to be correct.  We continue to see fixed income as a place for safety and a place to park assets when the risk of trade comes into vogue.  However, yields are historically low and a dislocation on the fixed income markets could prove to be a low point on the 10 year bond yield. We feel it is prudent to keep bond portfolios with shorter durations to protect against the future upward movement in the bond yield. We believe treasuries and high yield are more at risk than investment grade corporate debt. We also believe that bond investments need to be diversified with investment grade emerging market bonds, among other sectors, that would help balance out the risk.

Commercial & Residential Real Estate:  The housing data, while improving, is in no way a green light to start throwing investments into any major amounts of assets into this space.  There were certainly some good buys out there, but real estate is not a short term trade and it has bounced back off of a low, but do not get too excited.  The presence of speculation in the space is showing itself again. We still see brick and mortar retail having a tough time and multiple unit rental properties being the better place to invest.

Absolute return hedge funds are finally outperforming fixed income and we expect that to be the case for the long-term.  To keep fixed income portfolios in check by lowering volatility these vehicles offer the promise of outperformance with the same volatility as bonds.  The great rotation that was expected from fixed to equities never happened, but we see the rotation actually happening between the fixed income and the hedge fund space.

Commodities:  The US dollar strengthened dramatically during the Cypriot crisis and that helped bring down the price of commodities.   QE3 and QE4 make commodities a more fundamental investment in the great race to debase the developed nations’ currencies.  We see commodities bouncing back this quarter and as well for the rest of the year.

Have a peaceful Spring!!!!


Disclaimer: The views expressed by Granite Group Advisors, LLC through the end of every quarter are subject to change at any time based on market and other conditions. This commentary is prepared exclusively for Granite Clients.  This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. This is not intended as investment advice, please contact your personal investment advisor before taking any action.


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