Stocks have taken flight after Donald Trump’s election victory. The Dow Jones Industrial Average and the S&P 500 both hit new highs in the past months. New all-time highs, in turn, have ignited a market concern: Are we due a market correction?
Worry is the reflexive reaction to new highs coupled with an extended bull market. At the beginning of 2016, chatter of an impending market correction filled the air. After all, the bull market, which began in early 2009, was already long in the tooth. 2016 would mark the beginning of the eighth year of an up-trending market. Morningstar data tell us that bull markets have lasted an average of 97 months – roughly eight years – over the past century. We head into the ninth year as we head in 2017.
But averages tell an incomplete story.
Market Correction After Long Bull Market?
In the current bull market, the S&P 500 is up roughly 200% since March 2009. The advance is hardly alarming; it’s only the fourth-strongest advance on record. Three other bull markets moved higher, with one a quantum leap ahead: The 1987-to-2000 bull market saw the S&P 500 rise 580%. It lasted nearly 13 years.
So, yes, this bull market is long by historical standards; it’s also not especially strong by historical standards.
Earnings growth should further assuage worried minds. FactSet reports that S&P 500 earnings for the fourth quarter should grow 3.2% year over year. If earnings growth materializes as FactSet expects, it will mark the first time the S&P 500 has seen year-over-year earnings growth for two consecutive quarters since the fourth quarter of 2014 and the first quarter of 2015
We’re off to an encouraging start. Four percent of S&P 500 companies have reported fourth-quarter financial results. Of these reporting companies, 68% have beat the mean EPS estimate.
Earning growth is reassuring . . . as long as we pay a reasonable price for it. Are we paying too much for S&P 500 earnings?
We are paying more than we have in recent history. The S&P 500 trades at a 17.1 forward multiple to current earnings estimates. The five-year average is 14.4; the 10-year average is 16.1. So, investors are paying a premium for S&P 500 earnings, but not an egregiously high premium.
Besides, individual stock selection is my focus, not the broad-market indices and averages. The latest issue of Barron’s ran an article titled “Why 2017 Could Be the Year of the Stockpicker.” The article avers that stock-picking could return to vogue because market sectors have become less positively correlated.
An Out-Of-Favor Sector
I aver a more straightforward reason to favor stock-picking. I focus on sector rotation. That which was less popular becomes more popular, and vice versa.
Few stocks have been less popular over the past 12 months than energy stocks. I expect these stocks to gain popularity under the new regime. Trump wants the EPA and other government regulatory agencies to treat oil, gas, and coal less autocratically. In addition, Trump wants to open federal lands to oil-and-gas fracking and for further build-out of oil-and-gas pipelines. I applaud these moves.
I’m especially partial to oil refiners, which have been strangled by regulatory overlording by the old regime. Refiners, many with severely depressed prices, should recover in 2017. In fact, they already are. Shares of HollyFrontier Corp. (NYSE: HFC), a large independent oil refiner, are up 27% since the market open on Nov. 9. Despite the run-up, HollyFrontier shares still yield 4%.
Two Financial Stocks
As with energy, Trump wants to reduce the regulatory burdens on financial institutions. Two financial recommendations I like. And, no, they’re not banks.
I like BGC Partners (NASDAQ: BGCP), a large institutional financial and real estate broker, and its 6.2% dividend yield. I also like Blue Capital Reinsurance Holdings (NYSE: BCRH), a niche reinsurer, and its 11.6% dividend yield. The former is up 18.7% since the election; the latter is up 5%. I see more upside. Both companies should prosper in a rising-interest-rate environment.
A new president, a new political agenda, and a new Federal Reserve interest-rate policy . . . we have a lot to contemplate. What we’ve contemplated so far leads me to believe stocks will retain their standing as the investment class of choice heading into 2017. That is, the right individual stocks will retain their standing.