What happens to the markets in 2017?
The outlook for stocks is positive, but which sectors of the market do better or worse partially depends how what policies the President-elect Donald Trump implements.
First, the economy looks set to speed up next year, to 2.3 percent growth versus 1.5 percent this year, according to estimates from PNC Financial Services Group. Faster growth is very important, because it should lead to better company earnings.
If PNC’s forecast comes true, then it’s likely to help lift stock prices.
[See: 7 of the Best Stocks to Buy for 2017.]
“Equity markets are transitioning from an interest rate-driven to an earnings-driven bull market,” states a recent report by Jeffrey Saut at Raymond James & Associates. The stock rally following the financial crisis has largely been driven by the Federal Reserve’s historically low interest rate policy.
Low interest rates made stocks, especially those paying dividends, attractive relative to bonds. Now Raymond James sees a switch toward earnings being the key driver of the U.S. market.
T. Rowe Price’s outlook predicts a “strong rebound” for 2017.
Next year’s earnings are far more important to investors than are this year’s. Why? It’s because market participants look forward into the future, typically about nine to 12 months.
If T. Rowe Price is correct, expect a general stock rally in the U.S. That’s dandy, but it belies the fact that not all sectors of the market will do equally well. There will be winners and losers.
“The election has been positive for some groups and not so positive for other groups,” says Mark Spellman, portfolio manager at Alpine Funds, in Purchase, New York.
Health care is not all sick. The health care industry shows this dichotomy in spades.
“Health care, a broad category; Obamacare is absolutely toast,” Spellman says. “With both houses of Congress on his (Trump’s) side, the implication is that the insurance exchanges and hospitals will have a step down in profitability.
But on the other hand, the pharmaceutical industry may benefit. It had been dogged by concerns of increased regulation over pricing of medications. That likely won’t be so much of a concern now, given the Trump administration’s pro-business stance.
That means the VanEck Vectors Pharmaceutical exchange-traded fund (ticker: PPH), which tracks a basket of drug companies, may see gains, but the iShares US Healthcare Providers ETF ( IHF), which hold health insurance companies as well as related stocks, not so much.
[See: 8 Ways to Profit From Donald Trump’s Infrastructure Plans.]
The Van Eck fund has annual expenses of 0.36 percent, while the iShares fund costs 0.44 percent. That equates to $36 and $44 per $10,000 invested, respectively.
Military spending, energy. “Defense spending should receive a boost,” says Sinead Colton, head of investment strategy at Mellon Capital in San Francisco. It seems clear that Trump wants to defeat the Islamic State, and that doing so will cost money. Expect military-related companies to do well.
Investors might want to take a look at the PowerShares Aerospace & Defense ETF ( PPA), which holds a basket of military and aerospace-related stocks. It has annual expenses of 0.64 percent or $64 per $10,000 invested.
Likewise, the traditional fossil fuel energy is clearly favored by the incoming Trump administration.
That could be a double-edged matter for the industry, Colton says. On the one hand, a pro-fossil fuel administration could mean more drilling by major oil companies. On the other hand, more drilling would also mean more supply on a global level. Prices for crude have dropped from more than $100 a barrel in mid-2014 to less than $50. More supply could push them down further.
Infrastructure. Anyone who has driven along American highways, over bridges or in tunnels knows that the country’s infrastructure is in desperate need of repair. The Trump administration seems committed to spending heavily in this area.
Materials companies should do well such as those held in the Materials Select Sector SPDR ETF ( XLB). The fund has annual expenses of 0.14 percent, or $14 per $10,000 invested.
Go overseas. “Outlook for stocks should distinguish between foreign and domestic stocks,” says David Ranson, director of research at HCWE & Co. “I strongly favor foreign, especially emerging market stocks.”
He sees “years” of good gains ahead before the run-up in emerging markets ends.
For instance, the broad MSCI emerging markets index is up 6.7 percent, while the narrower MSCI Latin America index is up 25 percent over the same period.
The reasons he’s so bullish are many, but a big part of it is that there is “an improvement in risk tolerance,” he says. That means investors see good potential growth in emerging markets and they are sending their capital to such countries.
[See: 10 Great Ways to Buy Emerging Markets.]
Investors interested in investing in emerging markets might want to consider the iShares MSCI Emerging Markets ETF ( EEM) or Schwab Emerging Markets Equity ETF ( SCHE), which have annual expenses of 0.69 percent and 0.13 percent, respectively. That equates to $69 and $13 per $10,000 invested for each of the funds.
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Wall Street Predictions for 2017 originally appeared on usnews.com
