Video Length: 00:40:24

Macro view

High equity valuations, low interest rates and low oil prices are here to stay. Large deficits are likely to continue, pinning down interest rates. In the absence of any good alternatives, equity valuations are likely to remain high by historical standards. Oil prices are likely to remain in the $40-60 per barrel range as producers under-estimate their costs and continue to be funded by complacent capital markets.

Earnings round-up

Corporate profit performance has been disappointing this year. Although retail stocks have gone up in the last few weeks, these companies continue to show declining sales, margins and profits. Years of overvalued acquisitions have caused GAAP profits at pharma companies to decline meaningfully, although they claim to be generating huge non-GAAP profits by excluding a lot of economic costs. The bright spot has been advertising technology firms like Google (GOOG) and Facebook (FB).

The Trump effect

Trump's potential agenda will have a mixed impact on markets. On the positive side, we have lower individual and corporate tax rates and the repatriation of foreign profits at a low rate. Infrastructure spending is neutral to negative as the money has to come from somewhere and is likely to be spent on low-return projects. Tariffs and trade wars will be a huge negative. The overall impact is not as positive as from a reduction in government spending.

A few stocks to own

In the current market, it is hard to find undervalued sectors, although there are some individual stocks at reasonable valuations. I would recommend DIS, AMGN, HCA, LYB and LGIH.

The January effect

Finally on a technical note, the market is likely to decline early next year. Many stocks (e.g. financials) have had a sharp run-up and are ahead of their fundamentals. The prospect of lower capital gains tax rates next year is making investors loath to sell, and price-insensitive buyers like ETFs have caused a rapid move up in stock prices. The last time tax rates were slated to decline (in 2001), the market declined 15% in Jan/Feb.