Expectations for growth have decreased in recent months, anticipation rising for improvement in US and global economic data.
After reaching a new all-time high in July, the S&P 500 Index sold off sharply at the beginning of August on a combination of US/China trade tensions and overall economic concerns. This sell-off coincided with a temporary inversion of the yield curve, which has historically been a precursor of a future recession. Equity and bond markets became even more sensitive to daily trade policy updates, economic news, and speculation over the future direction of interest rates by the Federal Reserve. By quarter’s end, the S&P 500 Index finished up 1.7% after increased volatility led to a 7% trading range during the quarter.
In the year-to-date period through 9/30/2019, the S&P 500 has advanced 20.55%, the Bloomberg World Index (International) is up 14.77%, and the Barclays Aggregate Bond Index (Fixed Income) is up 8.52%.
While performance of our strategies for the first six months of 2019 was largely in line with benchmarks, our Focus and Growth portfolios underperformed sharply during the third quarter, while our Dividend portfolio continued to advance with the broader market. The Biondo Focus Strategy was up 6.55%, the Biondo Growth Strategy up 7.49%, and the Biondo Dividend Strategy up 17.67% in the year-to-date period, all net of fees.
As is typical with high-conviction concentrated portfolios, a few positions can have a large impact on performance and this was certainly the case in the most recent quarter. From 6/30 through 9/30, some of the larger positions in our Focus and Growth portfolios suffered severe declines and were large detractors from performance. In the quarter, the four largest detractors to performance were:
- Align Technologies (ALGN): -34%
- Abiomed (ABMD): -32%
- Exact Sciences (EXAS): -23%
- Illumina (ILMN): -17%
Although other healthcare holdings were not as severely negative, our exposure to the sector was not favorable for four major reasons as we see it:
Style: a shift from Growth to Value
Sector: the healthcare sector was one of the worst performing sectors for the quarter
Trade Tensions: many investors see China as a huge growth opportunity for healthcare
Political: Democratic candidates Sanders and Warren on the rise – Medicare for All
While we view some of these issues as transient in nature, we do not expect immediate relief. Trade discussions with China appear to change on an almost daily basis and may very well be impacted by the pending impeachment inquiry on the domestic front. Likewise, the election season has yet to begin and we expect campaign rhetoric to heat up in earnest in early 2020, and we remain a little over a year away from the election itself. That said, we believe that current prices across the healthcare sector have likely priced too much negativity from these concerns. We continue to believe that in the long run, the earnings growth available in our holdings will be reflected in the appreciation of these companies should our holdings deliver the earnings growth that we anticipate in the coming years.
Throughout 2019, we have had concern about valuations in growth stocks. As a result, we have had elevated levels of cash in the portfolios throughout the year. While this has not helped our short-term performance, investing at reasonable valuation is an important part of our process. As earnings continue to grow and/or price/valuations become more attractive, we will invest in what we believe to be great companies run by competent people at attractive valuations.
As we begin the final quarter of the year, markets still face many of the same concerns. Economic data has softened in recent months and there are questions about how much impact interest rate decisions from the Federal Reserve will have on economic activity. As a result, investors will likely have increased focus on the trade negotiations between the US and China. A deterioration in trade talks could put further pressure on global economies and business/consumer sentiment, while any reduction or postponement in tariffs could spur renewed optimism that growth can return.
Since January of 2018, equity markets have largely been stuck in a trading range. In reviewing the S&P 500, that Index reached a high of about 2875 in January of 2018 and a low below 2400 in December. At the end of September of this year, the S&P 500 stood at about 2975. While volatility has led the markets through a few large up and down cycles, little headway has been made since the highs of January of 2018.
The next major move in equity markets will likely be determined by economic activity and the impact that has on corporate earnings. While expectations for growth have decreased in recent months, we anticipate an improvement in US and global economic data. The Federal Reserve has shifted to a more accommodative stance and we expect more rate cuts in coming months. If earnings continue to expand, albeit at a more moderate pace, and the US avoids recession, we believe markets will break out of this trading range to the upside and to new all-time highs. Major risks continue to be US/China trade and an economic recession in the US.
Given the current backdrop – global markets near all-time highs yet plenty of downside risks, there is no better time to review your goals, revisit your future expectations and evaluate your overall asset allocation and risk tolerance. Clients that have taken advantage of Wealthmap – our financial planning platform, and Riskalyze – our platform for aligning your risk tolerance to the proper investment portfolios, have gained confidence. I strongly encourage you to take advantage of all of the capabilities that our firm brings to bear that will allow you to live with increased financial confidence. At the risk of being redundant, the following is a review of some of our capabilities:
Wealthmap is our comprehensive financial planning process and tool that allows you to organize all of your financial accounts regardless of which institution they are held at, collaborate and plan for any financial goals that you have, safely and securely store and manage your most important financial documents, and have access to all of this information from any mobile device.
Built on a Nobel Prize-winning framework, Riskalyze quantifies the semantics of the financial advice industry, replacing confusing and subjective terms like “moderately conservative” and “moderately aggressive” with the Risk Number, a number between 1 and 99 that pinpoints your exact comfort zone for downside risk and potential upside gain. Our Wealth Advisors are then able to pair our investment strategies to match your Risk Number and chart a clearly defined path to your goals.
WealthSense will cover a wide range of behavioral finance topics, with the ultimate goal of educating our clients to become better investors. We live in the age of information and there is no shortage of financial news and coverage available. Along with that comes misinformation, and our goal is to act as your filter in order to allow you to make sound and more informed decisions.
As always, we thank you for the trust and confidence that you have placed in our firm. Our team stands ready to guide you in the various aspects of your financial life, and we encourage you to reach out with all of your questions or concerns. In the meantime, our best wishes for a happy and healthy rest of 2019.
Joseph P. Biondo
Chief Executive Officer
Chief Investment Officer
Sources: HAS & Wealthscape; strategy returns, Bloomberg; index returns, market highs, CNBC; fed rates, Observer.com; US China truce, Marketwatch.com; economic data, Brogan Equity Research; money flow; Dorsey Wright; relative strength
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.