What now for the Dow? With the Dow Jones industrials index hovering just below the rarefied 20,000 level, small investors have turned into voracious buyers, attracted by fast-rising stock prices. But the professional managers handling institutional money, who have been the aggressive buyers pushing the Dow and S&P 500 to record highs, have now turned somewhat cautious.
They’re mostly in a pause-and-review mode, trying to digest recent gains and sizing up what to expect next year under a new Trump administration. Has the market run way ahead of itself, as some observers suggest, or is it just at the beginning of another bull market?
“Stocks aren’t exactly cheap today, but they aren’t terribly expensive either,” said Morningstar in reviewing the current investing trends ahead of 2017.
Over at CFRA, formerly S&P Global Market Intelligence, its Investment Policy Committee has a relatively optimistic outlook and established its 2017 target for the S&P 500 at 2,335, up from its current at 2,262.
“We think equities remain the asset class of choice, and now recommend a 65 percent exposure to global equities and a 35 percent weighting in fixed income,” said Sam Stovall, chief investment strategist at CFRA. “We also increased our recommended exposure to foreign stocks due to relatively attractive valuations and dividend yields,” he added.
CFRA expects U.S. GDP to expand by 2.3 percent in 2017, helped by a 2.6 percent gain in consumer spending and a 3.2 percent rise in capital spending, possibly aided by an increase in infrastructure outlays, according to Stovall.
The big question is which segments of the stock market show attractive values after the record-setting rally. Several demographic, financial and economic trends, both domestically and internationally, are likely to dominate, such as health care, financial services, infrastructure and emerging markets.
Demographics are already spurring major demand for a range of health care offerings as thousands of baby boomers turn 65 every day and millions are already over age 70. Life expectancy is expected to rise for the most affluent Americans, which adds to increasing demand for newer and better medicines, treatments and medical technologies.
Elizabeth Collins, Morningstar’s director of equity research, said her team has identified “companies with underappreciated potential.” They include drugmakers Allergan (AGN) and major biopharmaceutical Roche (RHBBY). For investors who prefer a basket of health care stocks, she said a worthy vehicle is actively managed Vanguard Health Care (VGHCX), which Morningstar said “deserves a rating of Gold.” Among passively managed choices, it cited the Vanguard Health Care ETF (VHT), which owns mostly U.S.-based stocks.
Financial-service stocks are also expected to be in demand, as the U.S. and Western economies continue to rebound. And this week’s decision by the Federal Reserve to raise interest rates is a big boost to banks and financial companies because higher interest rates generally mean higher profit margins for them.
Morningstar equity analyst Michael Wong said “we continue to see the acceleration of three key wealth-management trends: a move to fee-based from commission-based accounts, increased usage of digital advice offerings and a shift to more passive investment products from actively managed.”
So he and Collins favor shares of Capital One Financial (COF) and Citigroup (C). And for investors who would rather invest in a managed product for financial-services exposure, Wong and Collins recommend Davis Financial (DFIBX), Fidelity MSCI Financials ETF (FNCL) and iShares U.S. Financials ETF (IYF).
Regarding infrastructure long-term plays, Donald Trump’s campaign promises strongly suggest he’s inclined to spend big on infrastructure. “We are going to fix our inner cities, and rebuild our highways, bridges, tunnels, airports, schools and hospitals,” said Mr. Trump shortly after the election. According to the American Society of Civil Engineers, the country needs about $4 trillion to update aging bridges roads, tunnels, water plants and other public amenities.
So it isn’t surprising that the stock prices of infrastrucure companies have shot up, which means they may not be exactly bargains at this point. But investors can still play the uptrend via a managed product, according to the Morningstar analysts. Among the passively managed options are Global Infrastructure (IGF), FlexShares Stoxx Global Broad Infrastructure (NFRA) and SPDR S&P Global Infrastructure ETF (GII). Among the actively managed funds are Russell Global Infrastructure (RGISX) and Deutsche Global Infrastructure (TOLSX).
One category that has been in an upswing is emerging markets, but it still makes sense to include these stocks in one’s portfolio, according to analysts who follow the group. One big reason is these markets represent the world’s most robust population growth areas, and the people in these relatively young nations will be investing in almost everything, from infrastructure to financial services.
According to Richard Turnill, global chief strategist for BlackRock, emerging markets will benefit from economic reforms, improving fundamentals and reasonable valuations. But since emerging market stocks are among the world’s most volatile, it’s best to invest in a basket of stocks rather than individual securities, noted Morningstar.
Among actively managed emerging-market funds, Morningstar assigns a Gold rating to American Funds New World (NEWBX), and among the passively managed ETFs, Morningstar awards Bronze ratings to iShares Core MSCI Emerging Markets (IEMG), Schwab Emerging Markets Equity ETF (SCHE) and Vanguard FTSE Emerging Markets ETF (VWO).
The bottom line in the analysts’ appraisal of the market outlook: It’s still an opportune time to invest if you broaden your scope to a variety of sectors.