From the Desk of Ernie Zerenner: A 2018 Market Forecast
At the start of a new year, it is time to reflect on last year and changes to be made in the next year. This is the time of year to make New Year’s resolutions, consider changes to your will or beneficiaries, and investment portfolios. The new year brings the opportunity to make 365 changes and 260 change opportunities to your portfolio.
This weekend I tackled the last one, possible investment portfolio changes. These changes were based on several basic assumptions:
- Our concern is that the market may be over bought as mentioned in our last Blog article ‘Some Market Parameters to Consider Heading into 2018‘.
- Historically we are overdue for a 10% level correction in stock prices.
- With the influx of more money going into the economy from tax reform, repatriation of foreign earnings, and infrastructure rebuilding, there will be steady upward pressure on inflation. Running presently a 2%, considered to be ideal, to 3% and higher, which will lower Price/Earnings ratios.
- We expect the above events to also create some market rotation into groups that were weak and out of sectors overvalued during the last years run up in stock prices.
Lofty valuations, increased inflation, and political/geopolitical tensions, will increase volatility and rotation of holdings into sectors like materials, energy, financial, and heath care. Some examples of potential holdings in these sectors are:
Materials – FCX, WPM, CF
Energy – SLB, GLOG, CVX, KMI
Financial – BAC, HQY
Health Care – VEEV, ALXN
Other – DIS, TIPS (cash)
Sectors to avoid would be bonds (unless very short-term), utilities, and telecom or other sectors generally purchased for dividends which may experience capital depreciation.
As cash is accumulated during the pruning process, it would be best stored in TIPS to provide some protection from erosion due to inflation. CVX and SLB have reasonable dividends and BAC, GLOG, WPM, and KMI have a growing dividend.
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