Dec. 19-23 Historically/Traditionally The Best Week To Be In Stocks The Entire Year; Outlook 2017 – This Bull Has Legs; Best Small & Mid-Caps For 2017; Asia 2017: Japanese, Chinese Stocks Will Lead
Christmas is coming, and we’re closing in on the end of 2016, and, a new year, with a new POTUS and national security team about to take the helm. I realize that we remain a deeply divided country; but, I am hoping that the Christmas spirit will prevail and those who are vocally opposed to POTUS-elect Trump will give him a chance. The country needs to heal, and move forward. And, with all due respect to the current First Lady, I finally have some hope after the past eight years; but then again, I am irredeemable and deplorable. But, enough of that.
The U.S. stock market has been on a tear since Mr. Trump’s election victory; and, many traders and institutions on the street do not think this rally is over Granted, the stock market is not a tree and doesn’t go straight up, nor down — and, we could soon see a healthy correction of 5 percent or so — but, the trend is still to the upside. Indeed, the week we are about to enter, Dec. 19-23 is historically, and traditionally the best week of the entire year to be in stocks — with half of December’s gains usually occurring during the five trading days before Christmas. Thus, that is why it is often referred to as, ‘the Santa Claus Rally.’ Because of the significant gains we have experienced since the November 8, 2016 presidential election, we may not necessarily see the kind of gains one would expect — but, I wouldn’t bet against it.
The big market moving news of the week last week, was the Federal Reserve’s much anticipated decision to raise the Fed funds borrowing rate by .25 basis points. But the indication that there could be three more rate hikes in 2017 was a bit surprising, as most traders and institutions had expected only two such hikes. But, business optimism has accelerated since Mr. Trump’s election, and there are many economists who think U.S. GDP growth could hit, or exceed +3 percent in 2017.
Despite a more hawkish outlook with respect to interest rate increases in 2017, the market mostly shrugged off the news, and may have even ended higher on Friday had it not been for the news about China absconding with one of our naval drones off the coast of the Philippines. China, has since agreed to return the drone.
For the week, the DOW gained 86.56 points, or +0.4 percent, to 19, 843 points, and just 157 points from 20K. It was the sixth consecutive week of gains for the DOW, with commodities, financials, and industrials leading the charge. Meanwhile, the S&P 500 fell just 0.8 percent, to close out the week at 2,258 points; and, the NASDAQ lost just 0.1 percent, at 5,437 points. For the year, the DOW is +13.88 percent; while the S&P 500 is +10.48 percent; and, the NASDAQ is +8.58 percent.
Outlook 2017: This Bull Has Legs
The above is the title of Vito Racanelli’s feature article in this weekend’s Barron’s. This is a lengthy article and I refer you to this weekend’s Barron’s for the full article; but, I will try and capture the key takeaways and stocks for 2017. Mr. Racanelli notes that Barron’s solicits an outlook for stocks, bonds, etc. twice each year, [each September & December] from 10 highly regarded investment strategists. This weekend’s article highlights what companies and sectors they see providing the biggest returns next year. But first he notes, “the unexpected election last month of Donald J. Trump as our next POTUS, has been a game-changer for the 10 investment strategists,” with even the bears among the group now turning bullish for 2017. “Wall Street’s seers expect the bull’s romp to continue well into 2017; and, posit a possible awakening among institutional, and individual investors,” Mr. Racanelli wrote. But, the strategists did warn that if POTUS Trump and the Republicans do not deliver on their promises for tax reform, eliminating excessive and onerous regulations, replacing Obamacare, and so on — the market will correct.
The 10 strategists see an average of a 5 percent gain in 2017 for the S&P 500 — from last week’s number referred to above. “In years past,” Mr. Racanelli wrote, “top forecasters have often called for a market gain of 10 percent; but, the second longest bull market ever is getting on in years, and besides, it has rallied furiously in the past five weeks.”
Financials are a favorite sector among the strategists Barron’s polled, and that’s not a surprise, as interest rates are set to climb at least three times in 2017 according to the latest Federal Reserve statement; and, POTUS-elect Trump is expected to relieve many of the onerous regulations the Obama administration placed on small business.
Strategists Stock Picks For 2017
For more detail on these stocks, I refer you to this weekend’s Barron’s; and, of course, make sure to do your own due diligence before buying. With that as a caveat, the strategists 2017 stock picks are:
Verizon Communications (VZ)
Alphabet (Google) (GOOGL)
Bank of America (BAC)
Honeywell International (HON)
iShares Emerging Markets Asia (EEMA)
iShares MSCI India (INDA)
Citizens Financial Group (CFG)
Best Small And Mid-Caps For 2017
The above is the title of David Englander’s article in this weekend’s Barron’s. FYI, Barron’s ‘Best Small and Mid-Cap Stocks For 2016,’ (including dividends), returned 25,8 percent, compared to the total return for the Russell 2000 Small Cap Index, with a total return of 23.5 percent, and the S&P Mid-Cap 400 came in a notch below that at 22.3 percent.” Last year’s performance does not mean they will be able to repeat, or exceed those great numbers again; but, that’s a darn good performance to consider.
Mr. Englander writes that “for 2017, we’ve zeroed in on five small and mid-size stocks in widely diversified industries. They are:
Equity Commonwealth (EQC) An office-property real estate investment trust — Sam Zell became Chairman in 2014;
AMC Entertainment (AMC) A movie/cinema operator. The company made two recent acquisitions — U.K.-based Odeon & UCI closed last month; and, a deal for Carmike Cinemas (CKEC) awaits regulatory approval. Mr. Englander notes that these acquisitions — if both are approved — will take AMC’s theater count from 385, to roughly 900. Carmike was one of Barron’s top picks from last year; and, is up 54 percent from a year ago to a recent $33.10;
E.W. Scripps (SSP) A political advertising firm, could see a boost in retransmission fees, which are expected to rise 20 percent in 2017. “At a recent $18.60, the stock looks undervalued, trading at 15 times the average-free-cash-flow estimates for 2016, and 2017,” Mr. Englander wrote;
Houghton Miffin Harcourt (HMHC) A textbook publisher and market leader, and expectations that several large adoption programs for their books in the next two years is expected in California, Florida, and Texas. Wells Fargo analyst William Warmington “looks for$187 million of free cash flow in 2017, rising to $260M in 2018. He values the shares at $16-$18. Shares recently closed around $10.80;
Real Industry (RELY) “An acquisition-oriented company, and aluminum recycler, also backed by deal-maker Sam Zell,’ has a lot of upside if things break their way. “The shares trade for an inexpensive enterprise value of [just] 7.2 times estimated 2017 Ebitda. Riley analyst Josh Nichols values the shares at $12,” Mr. Englander wrote. Shares recently closed around $5.50.
As always, no guarantees, do your own due diligence.
Asia 2017: Japanese, Chinese Stocks Will Lead
Shuli Ren had an article in this weekend’s Barron’s with the title above. While the U.S. raises interest rates, the dollar should strengthen vs other currencies, especially China’s Yen. “A weaker Yen, is good news for export-oriented Japan. Companies listed on the broad Topix index get about 40 percent of their revenue from overseas, so a weaker Yen could propel the Topix to 1800 by the end of 2017, or roughly 17 percent above last week’s level,” says the analytical firm, Garner. Morgan Stanley expects Japanese companies to grow earnings by 28 percent in 2017,” Ms. Ren wrote.
“The iShares MSCI Japan exchange-traded fund (ETF) (ticker: EWJ), returned 6.8 percent in 2016. Morgan Stanley now favors Japanese exporters; and, is bullish on cosmetics maker Kose (4922.Japan), and, Sony (SNE), and Sumitomo Mitusi Financial Group (SMFG),”
“Garner, who downgraded Chinese stocks in May 2015, just ahead of Shanghai’s spectacular crash, thinks that mainland China’s market is re-entering a bull market. He expects the Shanghai market to hit 4400 in 2017, which would be a 40 percent gain in Yuan terms.”
“Morgan Stanley expects corporate earnings in China to grow by 7 percent in 2017, vs a 9 percent decline this year.”
“Going ‘naked-long’ on U.S. listed companies such as Alibaba Group Holding (BABA) is dangerous,” said Junheng Li, Founder of the Chinese [equity] firm, JL Warren Capital. She notes that Chinese companies use the Yuan’s current spot rate when forecasting 2017 earnings, so they could miss guidance quarter after quarter if the Yuan gets weaker.”
“In the mainland China market, Morgan Stanley favors Spring Airlines (601021.China), hydropower generator, China Yangtze Power (600900.China), and drug-maker, Jiangsu Hengrui Medicine (600276.China).”
Sorry for the long note, I had a lot of ground to cover. All things being equal, this coming week is historically/traditionally the best week of the entire year for stocks. V/r, RCP.