Whenever there’s change in administration and policy, there’s opportunity in the financial markets, regardless of how one feels about the outcome. While we have seen a big run-up in all the major indices since the election, there may be some sectors worth considering.
For starters, it is likely that we will see corporate tax reform allowing U.S.-based companies to repatriate foreign cash for investment or dividend distributions without a huge tax bite. At the top of my investing list are those with a stockpile of foreign cash like Apple, Coke, Cisco, General Electric and Qualcomm.
Next, I am optimistic we will see some growth but growth brings inflation so the Federal Reserve is likely to increase interest rates. I am not too alarmed and think the increases will be small and gradual. However, that does mean bonds in the near term could be under pressure so I‘m avoiding longer-term bonds (maturity of over 5 years) and bond funds. In addition, stocks with a price earnings ratio of over 25 could see some pressure on valuations. However, we could see a nice uptick in small / mid-cap growth companies, especially those with a solid business model and a track record of profits. A few examples in the tech sector are Garmin, Seagate, Qorvo, FLIR and Maxim. I would also consider investing in the small cap index via the Russell ETF “IWM”.
Once the Fed does a few rounds of rate increases, it may be time to reconsider bonds. I like U.S. Govt, agency and corporate bonds rated A or better with a maturity of no more than 10 years. I buy the actual bonds (not bond funds) and generally hold them to maturity.
We will likely see some pull-back on regulations, especially for banks, energy companies and health care. But I believe a lot of the gains we saw in the days since the election were in these sectors so I don’t recommend investing there now.
I remain of fan of larger cap, market leading, big dividend stocks. I am a “buy and hold” guy and less concerned with the daily fluctuations and more about long-term staying power and cash returns. Some of these companies include 3M, Johnson and Johnson, Clorox, Emerson Electric and Met Life.
I currently own shares in all the stocks noted above, but before you buy, please discuss your situation with your financial and tax advisors to see what is appropriate for you.
Ray Link recently retired as CFO of FEI Company and currently serves on the board of directors of three high-tech companies. He is a CPA and holds an MBA from the Wharton School.