What does 2017 hold in store for us?
One thing we know unequivocally is that it will be year of above trend change and uncertainty. That has to be the case because not only do we have a new President, but also that new President is Donald Trump—who promises and will certainly deliver to some extent, new policies and laws that will have a significant effect on the economy, certain sectors and specific stocks. Even if Trump ultimately does very little, his iconoclastic communications alone will be enough to create a heightened sense of instability. In that environment there will be fear, change and opportunity.
If it sounds like I am focusing too much on the new President, so be it. I’m just convinced that he will be the primary driver of the narrative in 2017.
And so what can we conclude?
First of course there’s been a great deal of recalibration already after the election. And that’s familiar stuff now: stocks have rallied 10% on average, while infrastructure plays, cyclicals and financials have climbed more. On the other hand global consumer product companies and dividend plays, or bond proxies have lagged, as bonds have tanked while rates shave spiked. Fair enough. But is this the beginning of a trend or is that the extent of the Trump dislocation?
I would argue the former—that this is the beginning, not the end—at least over the medium term. Typically these big resets take years to run their course. Check out what hedge fund king and Bridgewater founder Ray Dalio had to say about how profound the impact of the Trump administration will be on the economy and the markets. Dalio references Margaret Thatcher and Ronald Reagan, and that could be underestimating things. Dalio’s analysis is well worth reading.
Or consider what a prominent Democratic Wall Street financier told me recently: “We lost. Now it’s time to make money.”
Here then are six market themes to note for 2017, along with action items. NB: If some of this stuff sounds obvious, ask yourself 12 months from now if you really heeded it enough. I know I never do.
Again the big overriding point is that what worked between the election and the inauguration will continue to work, (for instance companies that benefit from domestic construction, deregulation and higher rates), and so too will great evergreen success stories, like Yahoo Finance’s company of the year, Nvidia.
Otherwise:
Rates will rise
It kind of makes me laugh because this is really the ultimate Groundhog Day call, right? Last December, (2015), Janet Yellen raised rates and indicated there would be a bunch more hikes in 2016, and that didn’t happen. Of course we only had one hike almost exactly a year later (December 2016) and that might not have gone down had Trump not been elected. Now the Fed is once again indicating hikes for the following year after a December raise, as well as three more hikes in 2018 and 2019.
But don’t kid yourself. This time Janet Yellen will pull the trigger. The unemployment rate now stands at 4.6%, (full employment alert) and weekly jobless claims just came in below 300,000 for the 95th straight week (not a typo.) That’s almost eight years (hmmm…), the longest stretch since 1970. Consumer confidence is soaring.
Add to that the stimulating effects of Trumponomics and you are probably looking at a steady and serious march north for rates. (Only thing stopping this, is that most of the rest of the world for now isn’t nearly as healthy as the U.S.)
None of this is good for investments that feature yield.
Action item: Avoid bonds, dividend stocks, and all things yieldy, like REITs. (Hey remember the dividend bubble? Popped.) In fact trim your portfolio of such stuff and use the cash to buy other more appealing investments, which we’ll get too.
Taxes will fall
That much we know. But trying to figure this gets very muddy, very fast. That’s because there have been so many proposals both with regard to personal and corporate taxes that it’s tough, nay impossible, to know how this will play out. Meaning yes Trump has his proposals, but this is where he will have to work with Speaker Ryan et al if he wants to make hay, which he does. So there, will also be haggling and dare I say, compromise?
It’s likely that taxes will be cut for wealthier Americans the most, according to the Tax Policy Center. (The max rate would be cut from 39.6% to 33% according to Trump’s plan. (The other two rates would be 12% and 25%.)
But if you have been holding onto a security that you’ve been dying to sell and hoping that if you sell on January 3rd you will be doing so at a lower tax rate, think again. Assuming rates will be cut—safe bet—it’s unclear what parts of the new code or bills will be retroactive. I know, bummer.
Washington will almost certainly cut corporate tax rates from the current 35%. Trump has called for a 15% rate and 10% for foreign earnings. (There will be offsets in theory to make up for the huge revenues gaps the government would face, although of course government spending is to be cut too.) So all companies will benefit to a degree. Hard to blaze a trail with that.
And what about the companies that have $2.5 trillion stashed abroad that will likely get some sort of repatriation relief? The biggies are Microsoft, GE, (both with more than $100 billion overseas) Apple, ($90 billion) Pfizer, (almost $80 billion), IBM, Merck and Alphabet according to Capital Economics. These guys will get a nice bump, but will shareholders benefit directly? Maybe.
Action item: Look to sell long time gainers that are running out of steam after the tax bill is passed, probably in Q3. (I know far away.) Look at the list of companies set to benefit from tax cuts especially the repatriators—hey they’re blue chips—but make sure they don’t get hit later by Trump’s protectionist policies. Bottom line, buy and own big U.S. equities, especially ones with big exposure to domestic construction and energy. Speaking of…
Energy will rock
I mean really rock. Domestic energy production in particular is in a bit of sweet spot as it not only is considered stimulative, but it also fits Trump’s America first—not Persian Gulf countries—MO.
Larry Kudlow, a Trump economic advisor told me recently that “we have a first rate energy sector and Trump’s going take the handcuffs off that including President Obama’s most regrettable regulatory initiative — offshore drilling. That’s… going to happen.”
A recent note by Brean Capital talks about “pipelines as likely early candidates for support and spending,” as well as companies that will benefit from much needed work on the electric grid. “…energy, despite the recent run, has more upside from here….it is [also] hard not to notice that GE, for example, is still below $33 that it hit in the summer and is still below early April levels.”
Action item: Buy energy across the board. Petroleum in particular, not subsidized alt energy. The more domestic exposure the better. Forbes notes that here Seaport Global Securities likes Pioneer Natural Resources, Concho Resources, and Diamondback Energy, while RBC points to fracking beneficiaries like Halliburton, U.S. Silica, Fairmount Santrol Holdings, Nabors Industries, Patterson-UTI Energy Inc, and Helmerich & Payne. And don’t forget about coal companies (if you’re cool with that) and every else, from Exxon to Trinity to Brean’s GE call. Lot of room to roam here.
IPO’s will be headliners
In a sense this will be the flip side 2016, which was bereft of quantity—smallest number since 2009—and quality IPOs. (You know it’s a weak year when your headliners are Twilio, Line, Valvoline and ZTO Express!) So how about these names for 2017: Snap, Uber, Airbnb, Vice, Palantir, Pinterest, and Spotify.
I’ve been covering the markets for more years than I care to admit, and I can’t ever recall a bigger crop of mostly consumer facing, mega companies ready for harvest. Not all of them will go public, but many will and for good reasons. First the uncertainty of the election is over and with that valuations have spiked. Ah but for how long? And that’s the point. You could argue that this is a window these companies need to take jump through.
Action item: Start lobbying your broker now for allocations. I would be most interested in Palantir, exactly because it is NOT a consumer name—it is in the spyware security business—and because I think this business has almost unlimited potential, particularly in the Trump administration. On the consumer side I would be most interested in Snap, which owns the young adult market and has done a great job of going its own way in terms of partnership relationships, and Spotify, only because I’m a happy consumer. There are some other names that might be coming down the pipe too.
Defense stocks will fire up
This is a bit tricky because though there is much saber rattling these days by the President elect, he has publicly bashed both Boeing and Lockheed Martin for projects that cost taxpayers too much. In the end I think an anticipated military build up will outweigh any cost negotiating by Trump. In other words sure Air Force One (Boeing) will be built for less and so too the F-35 fighter (Lockheed), but overall these will be flush times for the merchants of death. I’m not judging, I’m just telling you think I think it will work.
Action item: Consider the aforementioned BA and LMT as well as Raytheon, Northrup Grumman, Huntington Ingalls, and General Dynamics, as well as ETFs: ITA, XAR and PPA.
China will be rough
I saw on a recent trip there that rising rates are already sending ripples through the red-hot retail real estate markets of Hong Kong and the mainland. I saw signs that blew my mind in Hong Kong, like an 800 square foot apartment in a pretty nice area for $1.9 million. That’s typical. And low rates helped fueled that.
It’s hard to appreciate how big a deal this is over there, but just know that most Chinese who can afford to, buy real estate not stocks. Meanwhile the Yuan continues to fall—now around 7 to $1. And capital continues to flow out of the country. This from Goldman Sachs: “China outflows pick-up. Our preferred gauge of FX flows (based on SAFE data) shows that FX outflows rose to $69bn in November, up from $40bn in October. Cumulatively since August 2015, FX outflows, according to our measure, have totaled roughly $1100bn and since July.” Starts to add up, no?
And most importantly, remember that Trump has as a cornerstone objective of his administration countering the economic power of China. In other words the President of the United States will be actively working to undermine this nation’s economy. Prominent short-seller Jim Chanos’s longstanding bearish call on China may finally hit pay dirt.
Action item: Be wary of investing in China in 2017.
So there you have it. I know there are all kinds of sectors I didn’t get into like consumer staples (could be weak with trade troubles), for-profit prisons (ding!) and healthcare where there will be huge winners, but as for the latter sector a) it makes my teeth hurt and b) it is soooo complicated and uncertain.
Bottom line: Happy investing and best of luck to you in 2017.
And let me know how you do. Somehow I know you will…
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Andy Serwer is editor-in-chief of Yahoo Finance.
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