Will the recently reinvigorated stock market experience turbulence or triumph in 2017? That’s the question Wall Street and the investment community are wrestling with as Donald Trump officially takes over as president on Jan. 20. That’s because the market’s massive rally following the Nov. 8 presidential election doesn’t necessarily point to, never mind guarantee, rosy returns for investors this year.
“New expectations set the tone for 2017,” said Elizabeth Collins, director of equity research for North America at Morningstar, in a review of the market’s performance in 2016 and which segments would be of interest to investors now.
“The market has incorporated expectations for stimulus, higher inflation, (from stimulating an economy already close to full employment), and higher interest rates (from higher budget deficits and inflation),” she noted.
U.S. financial services stocks reacted the most favorably to Mr. Trump’s surprise victory, along with the energy sector, which consequently suddenly became overvalued, according to Collins. She also noted that the basic materials group has continued to be “the most overvalued sector.”
So for investors, the critical issue is which stock to own now to protect and enhance your portfolio during the Trump administration. Individual investors, hedge funds, pension plans and other institutional investors are predictably struggling with this crucial issue of portfolio adjustments. (You’ll find 10 recommendations for solid large-cap stocks with great promise for the coming year below.)
Regarding strategy at this point, global investors should “consider portfolio themes that haven’t worked for the past nine years -- non-U.S. exposure, financials, capital equipment, active managers with concentrated portfolios and hedge funds,” advised Lisa Shalett, head of investment and portfolio strategies at Morgan Stanley. In the U.S., “the prospect of deregulation has unleashed animal spirits, but the strong dollar, rising rates, peaking profit margins and rich valuations complicate portfolio navigation,” she added.
And there’s the issue of age: The current U.S. expansion is 90 months old, more than twice the duration of expansions since 1900. “But age plus transition equal anxious opportunity,” argued Sam Stovall, chief investment strategist at CFRA, formerly S&P Global Market Intelligence.
He emphasized in a recent note to clients that “bull markets don’t die of old age, they die of fright.” What markets are afraid of is a recession, which Stovall doesn’t see on the horizon, although he also noted that “each of the 10 Republican presidents since Teddy Roosevelt endured a recession in their first term, with nine of them witnessing a recession’s start within their first two years in office.”
But Stovall believes “this bull market will likely be extended, not extinguished” and that investors should maintain an “equity exposure that’s appropriate for their time horizon and risk tolerance.” His baseline forecast assumes “modest GDP growth and mid-single-digit stock price appreciation, based on recovery from 2016’s earnings recession.”
He conceded that he could be underestimating 2017’s potential growth in GDP, per-share earnings and potential stock-price appreciation resulting from the favorable impact on consumer and investor confidence.
Stovall warned that although GDP and EPS growth estimates may accelerate in the year ahead, “we question whether this improvement will live up to current expectations implied by soaring post-election share prices, especially in a rising rate environment.” He suggests underweighting bonds but not totally avoiding them.
Given all the caveats and warnings about a runaway market and fast-rising overvalued stocks, “we label ourselves ‘bulls’ but with a lower case B,” Stovall said.
In effect, stock-picking prowess is most needed when adjusting the content and quality of an investor’s portfolio holdings. Among the stocks with attractive values and long-term endurance, 10 big-name large-caps stand out as reasonably priced -- with expectations of high returns -- and worth owning in 2017. Analysts on Wall Street generally expect the Dow Jones industrial average will hit 20,000 before long, with the S&P 500, Nasdaq composite and Russell 2000 small-cap index continuing to climb to fresh record highs. These 10 stocks are:
1. Facebook (FB) is the world’s largest social media company, which Scott Kessler of CFRA said has considerable competitive advantages “due to its global brands, substantial user bases, high levels of engagement and considerable access to user data/information.” The stock has been flat in recent weeks, closing the year at $115 a share. Kessler has a two-month price target of $155
2. Microsoft (MSFT) is the world’s largest software maker. But with the acquisition of Nokia’s device business and intellectual property, Microsoft has been getting further into the device market. CFRA noted that the company has been shifting its business strategy from a PC-centric world to a platform in which diverse equipment will access information via the internet and mobile devices.
3. Alphabet (GOOGL), formerly Google, is a global technology leader whose properties include YouTube, Chrome and Android. It’s also home to a number of emerging “moonshoot” initiatives, including projects involving driverless cars. Currently trading at around $792 a share, analysts expect the stock to run up to $940.
4. Pfizer (PFE) is one of the most attractively valued global pharmaceutical leaders. Its drug portfolio, according to analysts, is unmatched in breadth and depth worldwide. Analysts expect the stock, currently trading at around $32 a share, to climb to $40 next year.
5. FedEx (FDX) is a global leader in providing time-definite air delivery for packages, documents and freight in more than 220 countries, plus ground delivery of small packages in North America. The company is a big bet on the continuing improvement in the U.S. and global economies. Its stock has been on the rise since 2012 and is currently trading around $186 a share. CFRA analyst Jim Corridore has a 12-month price target of $240.
6. Comcast (CMCSA) is a global media and technology leader that operates through cable networks and broadcast TV, and also operates filmed entertainment and theme parks. In the U.S., Comcast is the largest cable system operator, with more than 22 million subscribers, partly through its controlling stake in NBC Universal. Currently trading at around $69 a share, analysts predict the stock will a hit $80 in 12 months.
7. Starbucks (SBUX) is a leading retailer of specialty coffee worldwide, operating in 62 countries. Analysts favor its shares in the consumer-oriented market for its global high-quality coffee business. It has more than 750,000 stores in the U.S. and more than 4,500 in international markets. Revenues from company-operated stores accounted for some 80 percent of total sales. After climbing as high as $62 this year, the shares ended 2016 at $55.52. Analysts expect the stock to hit the high $70s next year.
8. JPMorgan Chase (JPM) is one of the world’s highly recognized brands in banking and financial services, whose stock has been rising despite the industry’s problems in 2016. Now trading at $86 a share, a steep climb from its 52-week low of $52, analysts still expect the stock to push higher, to at least the mid-$90s in 12 months.
9. Walt Disney (DIS) is a leading global media conglomerate, with key operations in theme parks, TV, filmed entertainment and merchandise licensing. Its stock has been on a steady rise since late 2015, hitting a 52-week high of more than $106. Analysts predict the stock will climb to around $115 in 2017, based on its sizable multifaceted platform of popular entertainment brands, franchises and characters, recently boosted by the acquisition of Marvel. Plus, it has a strong management team.
10. Apple (AAPL) is the world’s most valuable company with a seemingly ever-evolving market for consumer-oriented tech products and other innovative devices, led by the globally popular iPhone and iPad tablet computers. Some analysts worry about the company’s dependence of the iPhone, which account for about 68 percent of total revenues, but Apple continues to defy the odds and predictions of sales collapse. The good news for value-oriented investors: The stock’s popularity on Wall Street has been diminishing because of disappointments about the lack of new breakthrough tech products. That has limited the stock’s rise, which ended 2016 at about $116. The pullback means investors seeking to own shares can buy at significantly lower prices before the stock again pulls higher due to the company’s next smartphone -- the iPhone 8, which promises to provide eye-catching features. Some bulls see the stock rising to as high as $150 next year. With some investors already looking toward Dow 25,000, Apple will likely be at the top of the heap if that actually happens.
“I am beginning to detech unthethered euphoria,” commented George Brooks, editor of the Investor’s First Read market letter.
Note: This story was updated to correct the time frame for analysts’ price targets for Comcast and JPMorgan.