H&W in the Media
U.S. equities are still the place to be, but it may be time to take some profits in certain names, expert Dave Donabedian told CNBC on Tuesday.
“Growth is good but you don’t want to overpay for it,” the chief investment officer at Atlantic Trust said in an interview with “Power Lunch.”
“Our strategy year to date has really been to look through the portfolio and look for names that have performed very well, where valuations are at the top end of their historical ranges, and do some pruning and recycle those proceeds into areas that perhaps didn’t perform quite as well in the first quarter,” he noted.
Donabedian sees opportunity for growth in areas like energy E&P companies, some technology names that have recurring revenue stream and even some industrial stocks.
Kevin Mahn, on the other hand, thinks there is more value to be found in international markets, which are in the early stages of a recovery.
That said, the chief investment officer at Hennion & Walsh isn’t discounting the potential for the U.S. market to move higher — and he thinks earnings could be the catalyst.
“There’s a chance we could get a double-digit earnings growth rate in the first quarter and if we do, that could propel U.S. large-cap stocks higher, mid cap and small cap will follow,” he told “Power Lunch.”
Mahn thinks investors just have to expect some volatility given the geopolitical and domestic policy uncertainty. He suggests diversifying portfolios by adding international allocations.
CNBC’s Jennet Chin contributed to this report.
By Kevin D. Mahn, president and chief investment officer, Hennion & Walsh Asset Management
1. Emphasis on US stocks over international stocks
While not abandoning international equities altogether (see Theme 3 below), I believe that it is worthy to consider overweighting US equities to start 2017 given heightened optimism for US economic growth plus accompanying US stock market growth in the new year as a result of the election of Donald Trump as the new US president, who is backed by a Republican-controlled Congress.
According to TheWeek.com, this is only the second time since 1929, the Republican Party will control the House, Senate, White House, most governorships and state houses, and decide a Supreme Court pick. One party having so much control may provide some tailwinds to stock market investors in 2017.
To this end, based on a MFS research report, it appears from the chart below that although the combination of a Democrat president and a Republican Congress has produced the best historical returns from 1961-2010, on average, for the stock market (which is defined in this case by the S&P 500 index (^GSPC), the stock market still experienced an average return of 12.1% when the White House and Congress were controlled by the same party.
S&P 500 returns based on political control
Source: Hennion & Walsh Asset Management
Please note: The Dow Jones Industrial Average (DJIA) measures the US stock market. Figures referenced are price change only and do not include the impact of reinvested dividends. The Standard & Poor’s 500 Index (S&P 500) measures the broad US stock market. It is not possible to invest directly in an index. Past performance is not a guarantee of future results.
As a result, the psychological achievement of Dow (^DJI) 20,000 may serve as more of a springboard for the next leg of this secular bull market as opposed to being a market top for this bull market rally that some are suggesting.
2. Consider different market capitalizations to help deal with strong US dollar
Rising interest rates in the US, coupled with declining or stagnant interest rates across the rest of the globe, could result in a stronger US Dollar, despite the stated reservations of this happening by Trump. This could, in turn, put pressure on multinational US companies that derive a significant portion of their revenue overseas.
As a result of the expected US dollar strengthening, certain mid-cap and small-cap US companies, which generally have less of an overseas focus when compared to their large-cap US counterparts, may be worthy of consideration to help minimize some of the strengthening US dollar risk while still allowing for allocations to US equities in general. Certain currency investment strategies may be worthy of consideration to assist in this regard as well.
3. Don’t discount the benefits of a globally diversified portfolio
International equities, through stock allocations in international developed markets and some international emerging market, should still be a part of most globally diversified portfolios in 2017 as a result of the anticipated stimulation measures on the part of central banks across the globe in the new year needed to spur additional economic growth.
4. Understand the role of bonds in income and growth-oriented portfolios
For income-oriented investors, bonds can provide for a dependable and consistent stream of income, and principal protection when held to maturity. Bonds, whether they are municipal, government or corporate bonds, can also provide for compounded growth opportunities when the income received from the bonds is reinvested.
Additionally, for growth-oriented investors, fixed income securities can provide investors with downside protection and diversification within a growth portfolio, especially in a highly volatile market where additional, measured, short-term flights to quality are likely.
In our view at Hennion & Walsh, investors should be careful not to miss out on the income and diversification opportunities offered by bonds by trying to time potential changes in interest rates. History has shown us that trying to time the market, or time interest rate increases or decreases, can be very difficult. With this said, it is important to understand that when interest rates do increase, bond prices may fall and yields may rise. However, rising interest rates should not impact the interest that bond holders receive on their bond holdings nor should they change the ability of these investors to receive par value on their bond holdings at maturity. Bond fund investors, on the other hand, may see the interest they receive on their fund holdings change in a rising rate environment and will not receive par value at maturity as there generally is no set maturity on bond funds.
While allocations to bonds may vary based upon market conditions and investor objectives and risk appetites, certain types of bonds, from certain types of issuers, can still find a home in most investment portfolios throughout most market cycles.
5. Selectively include ‘Trump trade’ sectors as appropriate
While recognizing that President Trump’s suggested priority initiatives, based largely on his “Contract with the American Voter” at this point in time, are subject to change and may either a) take longer than expected to achieve, b) not come to reality, or c) not deliver upon the intended results if achieved, investors would be wise to consider less significant, “satellite” allocations to areas of the US stock market that many believe stand to benefit over the term of a Trump presidency. Some examples of these potentially benefiting areas include energy equipment and services, industrials, banks, defense and cybersecurity.
Disclosure: Hennion & Walsh Asset Management currently has allocations within its managed money program, and Hennion & Walsh currently has allocations within certain SmartTrust® Unit Investment Trusts (UITs) consistent with several of the portfolio management ideas for consideration cited above.
By Kevin D. Mahn, president and chief investment officer, Hennion & Walsh Asset Management
US stocks raced upward following the election of Donald Trump on November 8, 2016, with the Dow Jones Industrial Average (^DJI) gaining over 8% and the S&P 500 index (^GSPC) advancing nearly 5% (both on a total return basis) from November 8, 2016, through December 30, 2016. Much of these gains were attributed to what news pundits are referring to as the “Trump trade.” On a high level, the Trump trade can be broken into four main areas of focus that many believe will be part of Republican President Donald Trump’s administration, backed by a Republican-controlled Senate and House of Representatives. These four areas are:
Current market consensus suggests that a Trump administration would be favorable for future US economic growth and beneficial for the US employment outlook. In terms of investment opportunities consistent with this optimistic market consensus, absent any specific proposals or introduced legislation, I look to “Donald Trump’s Contract with the American Voter” for indications of which areas of the market could potentially benefit from these primary areas of focus.
While the Trump trade can be dissected into many different themes, I highlight below a few of the key themes described within this document, along with the potential benefiting asset classes/sectors. I present this from my perspective with the understanding that all of these initiatives are subject to change and may not come to reality or deliver upon the intended results:
Key theme: Lifting of restrictions of American energy reserves, including shale, oil, natural gas and oil
Potentially benefiting asset classes/sectors: US equities, energy (XLE)
Key theme: Allowing energy infrastructure projects to move forward and spurring infrastructure investments
Potentially benefiting asset classes/sectors: US equities, energy (XLE), materials (XLB), and industrials (XLI)
Key theme: Repairing America’s water and environmental infrastructure
Potentially benefiting asset classes/sectors: US equities, materials (XLB), industrials (XLI) and US fixed-income/municipal bond strategies (MUB)
Key theme: Repealing and replacing of Obamacare
Potentially benefiting asset classes/sectors: US equities, health care (XLV)
Key theme: Speeding the approval process of life-saving medications in relation to the 4,000+ drugs currently awaiting approval at the Federal Drug Administration
Potentially benefiting asset classes/sectors: US equities, health care(XLV), specifically biotechnology (IBB)
This year is shaping up to be one of much uncertainty and potential volatility with numerous investment opportunities that appear attractive. While looking to uncover these investment opportunities, investors would be wise to build, or maintain, balanced and diversified portfolios consistent with their own financial objectives, tolerance for risk and investment time frames while resisting the temptation to make short-term investment decisions based upon potential fiscal policies or economic events.
At Hennion & Walsh, we are optimistic about the potential for US economic growth and US stock market gains, with limited and measured interest rate increases in 2017. However, we remain concerned about prospects for additional economic growth in other developed market economies and emerging market economies outside of the US.
We are also curious to see if the populist movements witnessed in the US, Great Britain and Italy in 2016 extends to other countries in 2017 and, if so, what implications might be felt as a result within our increasingly intertwined global economic and investment framework.
Hennion & Walsh Chief Investment Officer, Kevin Mahn, talks with Bobbi Rebell about the market expecations for the Donald Trump presidency.
Kevin Mahn interview on MoneyLife Radio talking with host Chuck Jaffe about opportunities for investors in 2017.
Click here to listen to the entire podcast.