U.S. equity markets experienced a broad decline on heightened concerns of slowing economic and profit growth, rising wages and tightening monetary conditions. Persistent global economic weakness, Brexit delays and the protracted U.S. and China trade negotiations contributed to the pessimism. Stocks fell into negative territory with the Russell 1000 Value Index falling 11.7% and the S&P 500 Index declining 13.5%.
In 2018, volatility returned to a more normal long-term average for the S&P 500 Index with a standard deviation of 15.8% versus an abnormally low 2017 standard deviation of 6.7%. According to Ned Davis Research, “In 2017, the Dow Industrials intraday volatility was the lowest since 1964 compared to 2018 when volatility matched the highest level since 2009.”
Dividend growth stocks are often referred to as lower beta or lower volatility due to their above-average dividend yield and quality characteristics, which can be less reactive to market swings than their non-dividend counterparts. Over the long-term, lower volatility dividend growers benefited investors by outperforming stocks that have larger drawdowns and higher standard deviations (see chart below).
The Navigator® High Dividend Equity portfolio has a historic beta of 0.76 versus the benchmark Russell 1000 Value Index of 1.0. According to Ned Davis Research, since the financial crisis in 2008, low volatility stocks’ risk adjusted returns outpaced those of high volatility stocks over the short, medium and long-term.
Sectors and Stock Selection
In the final quarter of the year, the best performing sectors in the Russell 1000 Value Index were mostly defensive, including the Utilities sector (+1.0%), Communications (-5.65%), and Staples (-4.16%). The weakest sectors were comprised of trade and economically sensitive industries such as Energy, which declined 24.5%, and Industrials and Basic Materials, which were down 19.3% and 14.3% respectively. Top performing stocks for the quarter were Broadcom (+4.1%), Lukoil (-4.7%) and Aflac (-2.6%). The laggards in the portfolio included Regions Financial (-26.4%), Viacom (-23.3%) and SunTrust Bank (-23.8%).
For the calendar year, the top sectors were Healthcare (+7.8%), Communications (+0.1%) and Technology (-1.4%). The worst performing sectors during 2018 were Industrials, which lost 18.9%, Energy, which lost 17.4%, and Materials, which dropped 17.1% compared to the index total return of -8.2%.
Sources: Factset, Ned Davis Research, Bloomberg
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The S&P 500 measures the performance of the 500 leading companies in leading industries of the U.S. economy, capturing 75% of U.S. equities.
The Dow Jones Industrial Average is a stock market index that shows how 30 large publicly owned companies based in the U.S. have traded during a standard trading session in the stock market.
The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performers of developed markets outside the U.S. and Canada.
The MSCI Emerging Markets Index is a freefloat-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.
The Russell 3000® Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market.
Bloomberg Barclays Capital U.S. Government/Credit Bond Index measures the performance of U.S. dollar denominated U.S. Treasuries, government-related and investment grade U.S. corporate securities that have a remaining maturity of greater than one year.
The Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 Index companies with lower price-to-book ratios and lower forecasted growth values.
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The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices and shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk. The S&P 500 measures the performance of the 500 leading companies in leading industries of the U.S. economy, capturing 75% of U.S. equities. The Bloomberg Barclays Capital U.S. Aggregate Bond Index is a market capitalization-weighted index, meaning the securities in the index are weighted according to the market size of each bond type. Most U.S. traded investment grade bonds are represented. Municipal bonds, and Treasury inflation-protected securities are excluded, due to tax treatment issues. The index includes Treasury securities, government agency bonds, mortgage-backed bonds, corporate bonds, and a small amount of foreign bonds traded in the U.S. The Bloomberg Barclays Capital Aggregate Bond Index is an intermediate term index.
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