In 2017, global equity markets fired on all cylinders with higher stock prices adding more than $9 trillion in market value. After nine years of underperformance, European corporate profits finally broke out of a trough with the top 600 companies posting an average of 13% earnings growth. In the U.S., the S&P 500 Index rose 21.8%, adding $3.9 trillion to the index’s market value. Incredibly, the S&P 500 Index rose every month in 2017 for the first time on record. Twenty-five percent of the S&P 500 Index value creation was derived from the five largest U.S. companies by market value: Microsoft, Apple, Amazon, Facebook and Alphabet.

After a lackluster year in 2016, growth stocks dominated value in all four quarters of 2017. Although dividend growers are more associated with the value universe than growth, they too posted solid results for the year. Not faring as well is the category of dividend stocks referred to as “bond proxy” stocks characterized by higher dividend yields and lower growth expectations found in sectors such as; Utilities, Staples and Telecom. Bond proxies are currently overvalued versus their dividend growth peers and vulnerable to underperformance in a rising interest rate environment. We expect dividend growers will continue to perform well compared to their bond proxy counterparts during the current trend where we are returning to a more normal economic expansion. Throughout 2017, Navigator High Dividend Equity portfolio had less than 15% exposure to the bond proxy sectors.

In 2018, S&P 500 Index earnings are projected to rise 12.3% up from 10.9%, representing a six-year high*. According to Banc of America Merrill Lynch, the December passage of the tax bill and West Texas Intermediate crude oil hitting $60 dollars a barrel has moved the S&P 500 Index three month earnings estimate revision ratio to its highest level since 2011. Top line trends also continue to improve, which could move the markets higher in 2018.

Dividend investors may benefit from the successfully passed tax reform and a reduction in the corporate tax rate to 21%, which could enhance profitability and cash flow, leading to higher shareholder payments. Repatriation of income earned by foreign subsidies could also be positive in the form of share buybacks, higher dividends and additional investment.

Sectors

During the fourth quarter, Navigator High Dividend Equity strategy gained 7.4% gross or 6.6% net versus 5.3% in the Russell 1000 Value Index. For the 10-year period ending September 2017, Navigator High Dividend Equity remains in the top 3% of all Morningstar peer group managers according to the most recently available data. Our positioning in the Technology and Industrial sectors added relative performance while exposure to Consumer Discretionary and Financials hurt performance. Our top holdings in Caterpillar and Texas Instruments were top performers versus Time Warner and HanesBrands which underperformed.

Sources: Ned Davis, Yardeni Research*

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