2016 was a rather boring year for the markets. That is until the surprising November election results left Americans thinking “Now What?”
Between Congressional action and Presidential tweeting, I believe the markets will be on edge in 2017. But even in this time of uncertainty, I do see opportunities in a few major asset classes which I would easily be overweight: Financials, Energy and U.S. Small Caps. While all three assets posted large gains after the election, I still believe they have the potential for further gains. Both Financial and Energy stocks have underperformed the market for the last decade, while Small Caps have treaded water versus Large Caps over the same time frame. All three assets should outperform their peers because of corporate tax and regulation changes, while the strong U.S. dollar could especially aid Small Cap stocks.
Financials and Energy stocks have been the two worst performing groups since the market peak of October 2007. Financial stocks are trading in line with their historical P/E valuation even though their future earnings potential has been unadjusted for the upcoming tax and regulatory changes in Washington, as well as the upward glide expectations of interest rates and a strengthening economy.
What do I see in the Financial Sector?
- Rising U.S. interest rates
- A stronger U.S. economy means better loan growth & reduced credit losses
- A corporate income tax cut has a significant impact given the concentrated U.S. revenues and earnings
- Less rules and regulation
- Financials have not outperformed the market for back-to-back years since 2000-2002
- The Bridesmaid for 2016
I think Banks, Brokers, Life Insurers, and Finance companies are best positioned in this sector.
I still believe there is a decent base value in the Energy sector, despite having both an OPEC and strong U.S. dollar risk. For 2017, I think U.S. growth could help global growth and that investors want more value-oriented and commodity-based equity exposure.