Globally, corporate earnings have been steadily growing and projections for 2018 look to be strong.

Happy New Year! We hope that your holiday season was fantastic and wish you all our best for a healthy and profitable 2018.
2017 is now behind us, so as is customary, we take time to reflect on what has occurred and look toward 2018 and the challenges that lie ahead.
2017 turned out to be solid for most global asset classes. US Equity markets were strong throughout the year, with the benchmark S&P 500 Index advancing 21.8% in 2017. International Equity markets were also strong, with the MSCI EAFE Index jumping 25.7%. Even Fixed-Income posted positive returns for the year, with the Barclays US Aggregate Bond Index up 3.5%.
We had a solid year in the strategies that we manage at Biondo Investment Advisors. The Biondo Focus Strategy led the way with an advance of 30.9%, while the Biondo Growth Strategy was up 24.5%. The Biondo Dividend Strategy also had a positive year, up 15.88%. These returns are after the deduction of fees.
Markets rose sharply in 2017 due to optimism over corporate earnings and global economic growth and our expectation is for this trend to continue. As 2018 begins, the biggest economic story appears to be the effect that the tax reform package will have on corporate earnings. Our view is that while earnings will continue to grow, 2018 is likely to have more volatility and more muted returns. While many may cite geopolitical risks as their top concern, ours is a rise in inflation.
2018 began with a sense of political turmoil coming from Washington. News included President Trump’s latest clash with North Korea, worries over restricted trade measures and struggles to reach bipartisan support over immigration reform. While we share concern over these and other issues, we see the markets largely ignoring them, as was the case throughout last year. While political risks certainly exist – particularly with mid-term elections this year, we do not see these posing a threat to the ongoing bull market.
Globally, corporate earnings have been steadily growing and projections for 2018 look to be strong. Revenues are increasing, profit margins appear stable and corporate tax cuts will be used in various ways to boost the bottom line for US companies. While earnings growth will eventually slow, we have always believed earnings drive stock prices higher and the outlook in the near-term looks healthy.
As stated above, the threat of inflationary pressure is squarely on our radar. Global economic growth has been particularly strong for the past year and a half, and the unemployment rate is at the lowest levels in over a decade. Simultaneously, the Federal Reserve continues to tighten monetary conditions. Combined with the recently passed tax reform, further economic expansion will likely result in upward pricing pressures – particularly in wages. This has benefits to the economy but could also complicate the picture for equity markets as we move forward.
While inflation has been largely absent during this eight year recovery, it is likely that we will see signs of a pickup in 2018. While recent data has been benign, price pressures could catch investors off-guard, which has the potential to change market psychology. To be clear, we do not expect runaway inflation circa the 1970’s. While extremely low interest rates inflated the prices of financial assets during the recovery from the global financial crisis, both wages and the prices of goods and services have been largely unaffected. We are concerned investors may have grown accustomed to this historically peculiar phenomenon.

The above chart depicts the emotions that accompany different phases of market cycles. While there is no timeline attached, this chart is a useful reminder. While it can be difficult to assess exact positions, our best guess is that we currently reside just past excitement and are on the way toward thrill and euphoria. While we see signs of froth (cryptocurrency), most investors (at least our clients) are still conscious of the risks associated with investing. The length of any cycle is the great unknown, as they all differ. Bull markets typically end coincident with the masses forgetting such risk and entering a state of euphoria. In our view, we are not yet close to that point – although we are always on the lookout for signs.
On balance, we expect 2018 to bring continued economic growth and reasonably positive returns for risk assets. We anticipate higher volatility in the markets and would not be surprised to encounter a market correction of 10-15% at some point in the year. We believe that equity markets provide the best way to access global growth opportunities. Our team continues to find what we believe are great businesses at elevated yet still reasonable valuations and we continue to remain committed to adjusting to the changing macroeconomic landscape, performing good research and exercising common sense.
The core of our investment philosophy is to invest in solid companies that are well-run and have above-average prospects for future profit growth. As we begin 2018, we believe that we are well-positioned in many such opportunities across the strategies that we offer. We expect our companies to deliver solid earnings growth in 2018 and offer another year of attractive returns, even if modest as compared to last year.
Please feel free to contact us to discuss your specific situation and how the various strategies that we offer can accommodate your needs. As always, we appreciate your confidence and our team stands ready to serve your investment needs.

Joseph P. Biondo

Chief Executive Officer
Chief Investment Officer
Portfolio Manager

Sources: Index Returns – Bloomberg, Strategy Returns – IAS, Chart – Benzinga
The information set forth regarding investments was obtained from sources that we believe reliable but we do not guarantee its accuracy or completeness. Neither the information nor opinion expressed constitutes a solicitation by us of the purchase or sale of any securities. Past performance does not guarantee future results.