Financial Insights

Holiday Boom for Some, Blues for Others: Lasting Investing Implications for 2017

We continue to see solid gains in the economy and markets overall, although the devil’s always in the details.  The consumer is still leading the way, but new macro policies coming out of the incoming Trump Administration should reinforce many of the trends we see in place.  Finding safe places to invest in 2017 has grown more challenging following the sharp run-up following the Trump win and we see significant market expectations for tax reform and growth-promoting policies already built into valuations. Our chief concerns center on stocks that are vulnerable to coming interest rate increases (utilities, consumer staples) and on those that have grown more expensive relative to history and the market. Nevertheless, we are still finding good value and long-term prospects in some corners of the market.  We highlight a few trends from the 2016 holidays that point to a few areas of opportunity and caution.

Holiday spending made for a strong finish to 2016 and helped buttress the sharp rise in stock prices since the election. Nevertheless, the S&P 500 is now trading at 17.1 times earnings in the coming 12 months and that’s slightly above both 5-year and 10-year averages. Earnings for S&P 500 companies are expected to grow 11.5% on revenue growth of 5.9%, but this is driven primarily by the energy sector, where earnings are expected to surge over 300%. Elsewhere, earnings growth is expected to range from 3.7% for telecomm to 16% for materials. In contrast, utility profits are expected to be roughly flat, while real estate is expected to contract by just over 20%.

Beyond energy and financials, 2017 is likely to be defined by whether consumer spending continues to strengthen and data regarding economic trends are pointing in the right direction. Year-end consumer spending and confidence reports confirm further strengthening in demand.  After strong showings during November and into December, retailers are expecting the strength to have continued through post-Christmas sales.  This bodes well not just for the holidays, but for 2017 as gas prices likely remain low and wages accelerate. Household balance sheets remain strong, house values continue to rise-and should continue to do so even in a rising rate environment, and inflation (for now) remains tame. We continue to see opportunities to invest in companies likely to benefit from higher consumer spending, the growth of the housing market, and the ongoing replacement of aging autos.

Some Investing Takeaways from the 2016 Holidays:

Finally, let’s not forget that the prospects for many U.S. firms depend also on the global consumer. Europe remains in earlier stages of its economic recovery, relative to the U.S., emerging markets are seeing some relief as commodity prices rebound, and China consumer spending continues to rise as a share of China GDP. While those offer potential tailwinds for U.S. firms serving foreign consumers, several risks put international demand on a rockier path. The U.K. will begin to extricate itself from the EU and this may disrupt jobs and spending on both sides of the channel. Commodity prices recovered a bit last year, but industrial activity is still on a downward trend in China, so the foundation for commodity price recovery—and the spending prospects in emerging markets—remains weak. China’s consumers may offer the strongest prospects for spending growth outside the U.S. While perceptions of China investments became wobbly over the last couple of years, the spending power of China’s consumers stands out when contrasted with US holiday shopping figures. China’s 2016 Singles Day (Nov 11) saw $17.8B spent online while US shoppers spent $12.8B over the five day Thanksgiving/Black Friday/Cyber Monday period. China growth may be slowing, but the middle class is growing and so is that group’s spending power.  Provided the Trump administration refrains from erecting costly trade barriers, U.S. firms should benefit not only from a strengthening U.S. consumer, but also as Chinese consumers increase spending on household conveniences, travel and leisure, cars, and electronics in the years to come.

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.


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