If your New Year’s resolutions involve tweaking your portfolio, here are some ideas from experts about what 2017 may hold and how you can try to take advantage through the stock market.
Tax cuts and more health care reform. Trip Miller, managing partner with Gullane Capital Partners, says changes in 2017 could lead to consumers having more money in their pockets.
Business will benefit in 2017 if the Republican regime in Washington implements tax cuts, loosens regulations and embarks on domestic infrastructure spending, Miller says. Corporations may also be able to repatriate money at lower tax rates, which would be a boon if they use it for capital spending and job creation.
He sees a repeal or revision of the Affordable Care Act, or Obamacare, reducing or stabilizing health care costs for corporations and individuals, although some health care companies that have benefited under Obamacare could get hurt. Pharmaceuticals such as Pfizer (ticker: PFE) and Merck & Co. ( MRK) have performed well since Election Day, while hospital stocks such as HCA Holdings ( HCA) and Tenet Healthcare Corp. ( THC) have struggled.
[See: 9 Ways to Invest in a Post-Election Market.]
A fundamental disconnect. At the beginning of 2016, the equities market was looking at things with a glass-half-empty perspective, says Katrina Lamb, head of investment strategy and research with MV Financial Group. But that has given way to optimism, and now the glass is completely full and “sloshing over the edges,” she says.
Yet there is a disconnect between this exuberance and the picture painted by fundamentals like jobs, employment, gross domestic product, corporate earnings and global growth, she says. Challenges include a strong dollar and growth that isn’t at pre-recession levels.
Even though the logic for a valuation ceiling that kept a cap on equities earlier in 2016 hasn’t gone away, equities are now more expensive than they have been in years based on price-sales and price-earnings ratios, she says.
“Our sense is that that is quite dangerous,” she says.
Infrastructure spending. Markets are believing in a high probability of massive infrastructure spending and falling corporate tax rates and a low probability of trade war or the Trump administration trying to shackle the Federal Reserve, Lamb says. Yet it is far from clear how the administration and Congress will act on trade and infrastructure initiatives, and many companies already pay less in taxes than headline rates because of complicated tax loopholes, she says.
[See: 7 of the Best Health Care Stocks to Buy for 2017.]
With this rally based on momentum and in the absence of tangible data supporting it, “we remain cautious that this rally can just keep going on its own steam for fundamental reasons,” Lamb says.
Diversification is the key. Over the last five or six years, it has been hard to beat benchmark stock and bond indices with a classically diversified portfolio, Lamb says. But given policy uncertainty and upcoming elections in Europe that may or may not lead to a continued rejection of the global power balance status quo, “diversification really may be the thing to do this year,” Lamb says.
Over the last five or so years, a simple portfolio of around 60 percent stocks an 40 percent bonds has performed very well, says Jay Jacobs, director of research with Global X Management Co.
But that could be changing as U.S. equity valuations have gotten pretty extended, he says.
On the fixed-income side, yields are low but increasing, meaning that bonds aren’t providing the capital preservation they once were even though income isn’t high, Jacobs says. Bond prices and yields move inversely to each other.
While the 60-40 portfolio model is still a good guideline, Jacobs says investors have been spoiled with its success. Instead of using a simple allocation to broad asset classes, he recommends that investors be more targeted and look to themes with long-term tailwinds, such as demographics, disruptive technologies and changing consumer behaviors.
Jacobs also points to bond alternatives like high-dividend stocks, preferred stocks, master limited partnerships and real estate investment trusts. These offer good yields but can also benefit as the economy strengthens, he says.
For the time being, investors shouldn’t get overly clever about fighting current momentum, but they should have 10 to 15 percent of their portfolio in cash, which offers a hedge, Lamb says.
Beware of the sleeping bear. Lamb believes that if the current momentum rally lasts into March, the market could be in for a correction of 10 to 15 percent. Investors would be hunting for bargains, but most stocks would be trading sideways — neither gaining nor losing in price. As long as there continues to be decent growth in the U.S. economy and nothing adverse disrupts the status quo in Europe, Japan and China, Lamb doesn’t foresee a long-term bear market.
With that case to prepare for, she thinks investors should look for opportunities to buy high-quality stocks, especially as dividend stocks of good companies in the utilities, defense and consumer staples sectors have been weighed on as interest rates have been rising.
Long-term investors should look to snap up dividend stocks of stable companies that offer longer-term growth when they have the opportunity to get them at good prices, she says.
[See: The 25 Best Blue-Chip Stocks to Buy for 2017.]
Investors should consider looking for blue chips in consumer discretionary, technology and health care companies, she says. These sectors have good names but have had somewhat troubled trading patterns, she says.
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5 Investing Tips From Experts for 2017 originally appeared on usnews.com
