Navigating the Market Volatility.
Happy New Year! We hope that your holiday season was wonderful and wish you all the best for a happy and healthy 2019. As we typically do in our first Perspectives of a new year, we will reflect on 2018 and share our insights for this year and beyond.
The fourth quarter of 2018 turned out to be quite abysmal for equity markets around the globe. The US markets suffered their first severe correction since 2015-16, while International markets continued to perform poorly as they had throughout much of the year. For the fourth quarter of 2018, the S&P 500 Index declined -13.52% while the Bloomberg World Index fell -13.11%. In the US, Value outperformed Growth for the quarter, with the Russell 1000 Value Index down -11.73% as compared to the Russell 1000 Growth Index declining by -15.88%. The only positive asset class in the quarter were Bonds, with the Barclays Aggregate Bond Index appreciating by 0.40%. Suffice it to say that it was a quarter many investors would like to forget.
The full year results presented more mixed results. International equity markets declined for the full year, with the Bloomberg World Index down -11.65% for 2018. US markets fared better but still were negative, with the S&P 500 Index down -4.38% for the full year. As we noted during the course of the year, Growth outperformed Value in 2018, as evidenced by the Russell 1000 Growth Index down -1.52% while the Russell 1000 Value Index declined -8.28% in 2018. Leaving little for shelter, bonds were also down in 2018, with the Barclays Aggregate Bond Index down -5.04% in 2018.
The three main equity strategies that we manage at Biondo reflect the disparity between Value and Growth as mentioned above. The Biondo Dividend Strategy, which is more value oriented, was down -11.29% in 2018. The Biondo Growth Strategy was up 3.22%, while the Biondo Focus Strategy was up 7.19% for 2018. Both Growth and Focus are comprised of growth-oriented companies. While the Biondo Dividend Strategy underperformed the S&P 500, it was largely in-line with the performance experienced in value stocks for the full year. We are very pleased that both Growth and Focus outperformed the S&P 500 for the year and also provided positive performance in 2018 in a down year for our benchmark. Many of our clients have exposure to more than one of these equity strategies, as well as to International and/or Fixed-Income, so results will vary according to the allocation.
During the fourth quarter, investors seemed to be grappling with the same issues that were largely ignored in the earlier part of the year – mainly the trade war and rising interest rates. While there are other concerns – like the current government shutdown and an earnings slowdown, it appears to us that trade and rates have been at the forefront. These two issues seem difficult to segregate from each other – investors are concerned that the trade war will slow the economy and reduce corporate profits. The Federal Reserve seems to believe that the economy is performing well and has continued to hike rates. A slowing economy with rising rates is less than ideal from an investor’s standpoint.
As we wrote in our end of year update a few weeks back, we are treating this environment as a severe, yet normal correction. In the early weeks of January, equity markets have shown signs of life and have had positive returns. Our expectation is that markets will likely advance and retreat for a while. While every environment is different, it is fairly typical after a severe correction like we have recently experienced for the markets to retest the lows at least once in the ensuing few weeks to few months. Thus, investors must remain patient and diligent as the markets find balance.
As we write, earnings season is about to begin and the first quarter is typically accompanied by more price volatility. As each company reports for the fourth quarter and full year 2018, most companies will also provide some guidance for the coming year in terms of revenue and earnings expectations. While this earnings season may be more muted than normal given the severity of the recent correction, we are typically able to glean some valuable information – both the actual news from each company and the market reaction to each report. Our process incorporates both and it is not uncommon for us to realign portfolios during these periods. This can lead to more portfolio activity – reducing or increasing exposure to existing positions and/or adding new positions to each strategy.
As we embark on 2019, we remain focused on the primary drivers of investment returns – corporate earnings and valuations. While expectations are for earnings growth to slow relative to 2018, prices have adjusted severely and markets are still anticipating positive earnings growth. Because earnings growth was strong in 2018 and markets were down, valuations have become more attractive relative to this time last year. To put figures to it – a year ago the S&P 500 traded at roughly 19 times forward earnings and today we are at about 14 times forward earnings. Thus, we have had a 6% correction in price in the past year, while valuations have become about 20% more attractive. Should earnings growth remain positive, this likely sets up for better returns this year.
Much of the above will be dictated by the outcomes of the aforementioned main market concerns. Will we get a trade deal done with China? While we can make a case that both sides have a very vested interest in doing so, only time will tell. Will the Fed continue to raise interest rates in 2019? Again, while we can make arguments both for and against such action, time will tell. Finally, will corporate earnings grow, even if more modestly than last year? These seem to be the questions that markets will grapple with throughout 2019. From our point of view, markets had largely priced in negative outcomes for all of these questions while at the lows of 2018, thus any positive developments on any of these fronts will likely buoy markets in 2019.
We remain confident that exposure to equity markets provide the best way to access global growth opportunities over time. As our team continues to find what we determine to be great business at attractive valuations, we plan to make long-term investments in these companies on your behalf. We are always committed to adjusting to an ever-changing landscape, performing sound research and exercising common sense. As we begin this year, we believe we are well positioned in many excellent businesses and are excited at the opportunity to find and invest in some new companies across each of our strategies.
Please feel free to contact us at your convenience to discuss your specific situation and how the various strategies that we offer can accommodate your needs. We are excited to be offering more formal financial planning services that we hope you take advantage of – more detail is available in this issue of Perspectives. As always, we appreciate the trust and confidence you have placed in us and we appreciate the opportunity to serve your investment needs.
Joseph P. Biondo
Chief Executive Officer
Chief Investment Officer
Portfolio Manager
Sources: returns; HAS –Wealthscape & Bloomberg – earnings growth; Bloomberg – S&P 500 & DJIA 2019 YTD; Gemini Fund Services
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.
FOURTH QUARTER REVIEW 2018
Biondo Investment Advisors
Navigating the Market Volatility.
Happy New Year! We hope that your holiday season was wonderful and wish you all the best for a happy and healthy 2019. As we typically do in our first Perspectives of a new year, we will reflect on 2018 and share our insights for this year and beyond.
The fourth quarter of 2018 turned out to be quite abysmal for equity markets around the globe. The US markets suffered their first severe correction since 2015-16, while International markets continued to perform poorly as they had throughout much of the year. For the fourth quarter of 2018, the S&P 500 Index declined -13.52% while the Bloomberg World Index fell -13.11%. In the US, Value outperformed Growth for the quarter, with the Russell 1000 Value Index down -11.73% as compared to the Russell 1000 Growth Index declining by -15.88%. The only positive asset class in the quarter were Bonds, with the Barclays Aggregate Bond Index appreciating by 0.40%. Suffice it to say that it was a quarter many investors would like to forget.
The full year results presented more mixed results. International equity markets declined for the full year, with the Bloomberg World Index down -11.65% for 2018. US markets fared better but still were negative, with the S&P 500 Index down -4.38% for the full year. As we noted during the course of the year, Growth outperformed Value in 2018, as evidenced by the Russell 1000 Growth Index down -1.52% while the Russell 1000 Value Index declined -8.28% in 2018. Leaving little for shelter, bonds were also down in 2018, with the Barclays Aggregate Bond Index down -5.04% in 2018.
The three main equity strategies that we manage at Biondo reflect the disparity between Value and Growth as mentioned above. The Biondo Dividend Strategy, which is more value oriented, was down -11.29% in 2018. The Biondo Growth Strategy was up 3.22%, while the Biondo Focus Strategy was up 7.19% for 2018. Both Growth and Focus are comprised of growth-oriented companies. While the Biondo Dividend Strategy underperformed the S&P 500, it was largely in-line with the performance experienced in value stocks for the full year. We are very pleased that both Growth and Focus outperformed the S&P 500 for the year and also provided positive performance in 2018 in a down year for our benchmark. Many of our clients have exposure to more than one of these equity strategies, as well as to International and/or Fixed-Income, so results will vary according to the allocation.
During the fourth quarter, investors seemed to be grappling with the same issues that were largely ignored in the earlier part of the year – mainly the trade war and rising interest rates. While there are other concerns – like the current government shutdown and an earnings slowdown, it appears to us that trade and rates have been at the forefront. These two issues seem difficult to segregate from each other – investors are concerned that the trade war will slow the economy and reduce corporate profits. The Federal Reserve seems to believe that the economy is performing well and has continued to hike rates. A slowing economy with rising rates is less than ideal from an investor’s standpoint.
As we wrote in our end of year update a few weeks back, we are treating this environment as a severe, yet normal correction. In the early weeks of January, equity markets have shown signs of life and have had positive returns. Our expectation is that markets will likely advance and retreat for a while. While every environment is different, it is fairly typical after a severe correction like we have recently experienced for the markets to retest the lows at least once in the ensuing few weeks to few months. Thus, investors must remain patient and diligent as the markets find balance.
As we write, earnings season is about to begin and the first quarter is typically accompanied by more price volatility. As each company reports for the fourth quarter and full year 2018, most companies will also provide some guidance for the coming year in terms of revenue and earnings expectations. While this earnings season may be more muted than normal given the severity of the recent correction, we are typically able to glean some valuable information – both the actual news from each company and the market reaction to each report. Our process incorporates both and it is not uncommon for us to realign portfolios during these periods. This can lead to more portfolio activity – reducing or increasing exposure to existing positions and/or adding new positions to each strategy.
As we embark on 2019, we remain focused on the primary drivers of investment returns – corporate earnings and valuations. While expectations are for earnings growth to slow relative to 2018, prices have adjusted severely and markets are still anticipating positive earnings growth. Because earnings growth was strong in 2018 and markets were down, valuations have become more attractive relative to this time last year. To put figures to it – a year ago the S&P 500 traded at roughly 19 times forward earnings and today we are at about 14 times forward earnings. Thus, we have had a 6% correction in price in the past year, while valuations have become about 20% more attractive. Should earnings growth remain positive, this likely sets up for better returns this year.
Much of the above will be dictated by the outcomes of the aforementioned main market concerns. Will we get a trade deal done with China? While we can make a case that both sides have a very vested interest in doing so, only time will tell. Will the Fed continue to raise interest rates in 2019? Again, while we can make arguments both for and against such action, time will tell. Finally, will corporate earnings grow, even if more modestly than last year? These seem to be the questions that markets will grapple with throughout 2019. From our point of view, markets had largely priced in negative outcomes for all of these questions while at the lows of 2018, thus any positive developments on any of these fronts will likely buoy markets in 2019.
We remain confident that exposure to equity markets provide the best way to access global growth opportunities over time. As our team continues to find what we determine to be great business at attractive valuations, we plan to make long-term investments in these companies on your behalf. We are always committed to adjusting to an ever-changing landscape, performing sound research and exercising common sense. As we begin this year, we believe we are well positioned in many excellent businesses and are excited at the opportunity to find and invest in some new companies across each of our strategies.
Please feel free to contact us at your convenience to discuss your specific situation and how the various strategies that we offer can accommodate your needs. We are excited to be offering more formal financial planning services that we hope you take advantage of – more detail is available in this issue of Perspectives. As always, we appreciate the trust and confidence you have placed in us and we appreciate the opportunity to serve your investment needs.
Joseph P. Biondo
Chief Executive Officer
Chief Investment Officer
Portfolio Manager
Sources: returns; HAS –Wealthscape & Bloomberg – earnings growth; Bloomberg – S&P 500 & DJIA 2019 YTD; Gemini Fund Services
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.