Tahoe Market Pulse: My 2017 forecast
January 27, 2017
Equities: I'll let others debate Donald Trump's policies, but it's clear that his administration will be friendlier to businesses through less regulation and lower corporate taxes. In such an environment earnings growth will accelerate and more than justify today's seemingly high valuations.
That said, I expect there will be more conflict between the Republican congress and the president than most think. Will the Tea Party Republicans approve more spending? Will Republicans vote for Trump's border tax or new tariffs? Tax reform is badly needed, but that might not happen as quickly as investors believe.
Overall, 2017 is shaping up as a banner one for earnings growth, led by an energy sector enjoying favorable year-over-year comparisons thanks to rising commodity prices. A rise in short-term rates and a strong dollar will be mild headwinds though. I expect the bull to add another 10 percent in 2017.
Bonds: Listening to the financial media one would think it's a certainty that rates will move higher, and not by a small amount. Virtually everyone says so. When everyone is on one side of a trade I'll lean the other direction.
That doesn't mean I expect rates to fall, but I don't think they'll rise much. Yes, the Fed will raise short-term rates a few times in 2017, but that doesn't necessarily mean long-term rates will rise. Instead, I expect a flatter yield curve.
Apparently investors in preferred stock agree as those securities have barely declined in response to last year's rise in rates and are on the rise again. Many preferreds yield six percent and don't have the market risk of stocks. Also without the upside potential, of course. Six percent sounds attractive to me and is why most of my clients own them.
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It is always safe to predict increased volatility, but that bet has been wrong for years. In 2017, however, I do expect volatility to increase. Instead of trying to participate in the advances and sidestep the declines, I prefer to own a portfolio with an acceptable level of volatility.
Boring isn't bad. My favorite equities are Pfizer (PFE), Enbridge Inc. (ENB), and Black Hills (BKH). Preferred stocks, especially those listed in past articles, remain great risk-to-reward holdings.
I hold far more preferreds for clients than other advisors do. Finally, bank loan funds are attractive in 2017. Bottom line: it you like last year you'll like this year.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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