While 2017 got off to a great start for investors in global equities, we believe that it is important for investors to take note of some potential key areas of changing market leadership that started to take form during the 1st quarter. These include, but are not limited to, the following:

Domestic Equities – To – International Equities

Developed Market Equities – To – Emerging Market Equities

Value – To – Growth

Small Cap – To – Large Cap

Energy-based Commodities – To – Metals-based Commodities

Financials/Energy/Telecom – To – Technology/Health Care/Consumer Discretionary

While we remain optimistic about the potential for U.S. economic growth and U.S. stock market gains, with limited and measured interest rate increases from the Federal Reserve, in 2017, short-term periods of volatility are likely given so much geopolitical and domestic policy uncertainty. As a result, investors would be wise to build, or maintain, balanced and diversified portfolios consistent with their own financial objectives, tolerance for risk and investment timeframes while resisting the temptation to make short-term investment decisions based upon potential fiscal policies or economic events. With this in mind, we suggest the following portfolio management ideas at this time for careful and thoughtful consideration.

• Consider adding international allocations to globally diversified portfolios

Despite concerns over the outcomes of certain upcoming elections overseas (ex. France), international equities, through International Developed Market, and some International Emerging Market, stock allocations, are worthy candidates for allocations within a globally diversified portfolio as a result of the anticipated stimulation measures on the part of central banks across the globe in 2017 needed to spur additional economic growth.

• Don’t ignore trends in areas of changing market leadership

In addition to international equities outperforming domestic equities during the 1st quarter of 2017, we believe that it is important for investors to take note of some other potential key areas of changing market leadership that started to take form during the 1st quarter such as growth outperforming value and emerging market equities outperforming developed market equities.

• Don’t discount the value of fixed income in income and growth-oriented portfolios

It has long been our contention at Hennion & Walsh that, for income oriented investors, bonds can provide the potential for a dependable and consistent stream of income, and principal protection when held to maturity. Bonds, whether they are Municipal, Government or Corporate bonds, can also provide for compounded growth opportunities when the income received from the bonds is reinvested.

Additionally, for growth-oriented investors, fixed income securities can provide investors with downside protection and diversification within a growth portfolio, especially in a highly volatile market where additional, measured, short-term flights to quality are likely.
In our view, investors should be careful not to miss out on the income and diversification opportunities offered by bonds by trying to time future, potential changes in interest rates. History has shown us that trying to time the market, or time interest rate increases or decreases, can be very difficult. With this said, it is important to understand that when interest rates do increase, bond prices may fall and yields may rise. However, rising interest rates should not impact the interest that bond holders receive on their bond holdings nor should they change the ability of these investors to receive par value on their bond holdings at maturity. Bond fund investors, on the other hand, may see the interest they receive on their fund holdings change in a rising rate environment and will not receive par value at maturity as there generally is no set maturity on bond funds.

While allocations to bonds, and other fixed income securities, may vary based upon market conditions and investor objectives and risk appetites, certain types of bonds, from certain types of issuers, can still find a home in most investment portfolios throughout most market cycles.

• Look to certain “Trump Trade” sectors for longer term growth potential

While recognizing that Trump’s suggested priority initiatives are subject to repeated change and may either take longer than expected to achieve, not come to reality or not deliver upon the intended results if achieved, investors would be wise to consider certain “satellite” allocations within their investment portfolios to areas of the U.S. stock market that should ultimately benefit over the term of a Trump Presidency (ex. Energy Equipment & Services, Industrials, Banks, Defense and Cybersecurity).

• Consider all U.S. market capitalizations

While many have suggested that U.S. Large Cap stocks may struggle to move higher given current valuations, the strength of their 1st quarter performance and threats posed by a strong U.S. dollar against multi-national Large Cap companies in general, there still may be more upside potential for U.S. Large Cap stocks within this secular bull market in our view. Though not necessary the best measure of valuation, consider the following Price/Earnings (P/E) ratios of the three U.S. market capitalizations as valuation proxies for these purposes:

Source: Bloomberg, April 10, 2017. P/E Ratio is the ratio of the price of a stock and the company’s earnings per share. It is calculated by taking the last price of a stock divided by the trailing 12 month earnings per share (EPS). Past performance is not indicative of future results.

While value can currently be found in U.S. Mid-cap and U.S. Small Cap, the return potential for U.S. Large Cap should not be entirely discounted, recognizing that all three market capitalizations are currently trading relatively expensive to their longer term averages – though some are more expensive than others, at least according to this one measure.