Will the Bull Run Continue?

Each year, the nine day festival of Sanfermines is held from July 6th-14th in Pamplona, Spain.  Popularly known as “the running of the bulls”, the origin of this event comes from the need to transport the bulls (typically six of the toro bravo) from outside the city (where they were bred) into the bullring (where they would be killed).  During the run, (mostly) young men jump in and run with the bulls in a show of bravado as they attempt to race in front of the bulls without being overtaken (or injured, or worse).
By the time you receive this edition of Perspectives, the festival will have taken place and the bulls will have run their course.  However, back on Wall Street, the bull run that began in 2009 from the lows of the financial crisis appears to be alive and well.  The first half of 2017 saw strength in global equity markets, with the S&P 500 Index advancing 9.34%, the Dow Jones Industrial Average up 9.35%, the Nasdaq Composite up 14.71% and the Bloomberg World Index advancing 12.00%.
While there has been considerable strength in global equities, there is a sub-plot to the 2017 story in that not all stocks are faring that well.  In particular, there is quite a disparity between growth-oriented companies (strong) and value-oriented dividend paying companies (not so much).  As evidence of this disparity, one can compare the 2017 performance of the domestic equity strategies that we manage here at Biondo.  Preliminary returns indicate that the Biondo Focus Strategy was up 19.47% in the first half of the year and the Biondo Growth Strategy advanced 13.18%, while the Biondo Dividend Strategy was up 2.99%, all net of fees.
While it is not out of the ordinary to see disparity in these different strategies, further examination can lead to some understanding.  Since the year began, the Federal Reserve has raised interest rates twice – from a range of 0.50-0.75% in January to 1.0-1.25% today.  While rates remain historically low – even accommodative to economic growth, these increases do make the dividends that companies pay less attractive on a competitive basis.  After all, there is inherently more volatility (risk) in owning stocks versus owning bonds, at least on a historical basis.  In addition, these increases make it less attractive for companies to employ the financial engineering tactics that have been popular in recent years.  That is, since money has not been flowing into the real economy at the typical rate during economic recovery, many companies have used cash or even debt to buy back shares and/or boost dividends in recent years, making their stocks more attractive to investors.  As interest rates increase, these tactics become less effective.
At the same time, the earnings picture has become remarkably attractive for growth-oriented companies.  S&P 500 earnings increased in the first quarter by over 10%, the best growth posted since 2012.  As we approach the second quarter earnings season, expectations are for a  nearly 7% increase for S&P 500 earnings, while expectations for the third and fourth quarter are currently set at 7.7% and 12.5% respectively.    Many growth stocks in growth sectors offer even more attractive prospects – technology and healthcare in particular.  As we have stated in the past, earnings growth is what drives markets higher in the long-run.  With expectations for solid advances for the foreseeable future, we expect markets will continue to be favorable from an earnings perspective, particularly for growth-oriented companies.
While earnings have been strong and expectations are robust for the remainder of the year, we do have concerns as we move forward.  The current bull market began more than eight years ago.  Along the way, we have seen market corrections of 10% or greater approximately every 12-18 months.  The last such correction ended in February of 2016, so it would not surprise us to see another correction at some point this year.  The Republican majority has continued to struggle with its agenda.  In the Spring, Congress’ attempt at “repeal and replace” was not successful and recently, the Senate version had to be delayed due to a lack of support.  As a result, tax reform policy now faces uncertainty as to impact and timing.  While we had low expectations for a major infrastructure package, news on that has been sparse.  Whether or not these factors are priced into today’s market levels remains unseen.  US equity markets currently hover near record levels, making them susceptible to negative shocks in the near term.
As always, we remain focused on what is in our control – the companies that we are invested in and positioning the portfolios that we manage to fit our intermediate and longer-term outlooks.  We will continue to own what we believe are great companies run by excellent management teams with solid prospects for future growth.  As always, we will continue to monitor and fine-tune these portfolios as our outlook for each individual company changes over time.
As a company, things are both busy and exciting at Biondo Investment Advisors.  Our team has handled the transition to Fidelity thus far in a relatively smooth manner.  While there is still work to do, we are enthusiastic about this transition and what it means to our (and your) future.  We appreciate your responsiveness and shared excitement.  As you will read in Kyle Clark’s piece, our expansion to Sparta is in full swing and we look forward to its completion and opening the additional office location this Fall.
As always, we encourage you to call and/or visit us with any questions or changes to your financial lives as they occur.  Our team is always prepared to help you navigate this aspect of your life and we welcome any and all feedback that you may have.   In the meantime, we wish you and your family a healthy and happy summer season.

Joseph P. Biondo

Managing Director

Chief Executive Officer
Chief Investment Officer

Sources: Index Performance – Bloomberg; Growth vs. Value – Seeking Alpha; Strategy Returns – IAS & Market Street Advisors; Interest Rates – Federal Reserve, Bloomberg;  Earnings Growth – Bloomberg and Factset Research;  Bull Market – First Trust; Corrections – Yardeni Research; Senate – Politico; Record Levels – Morningstar.