History never repeats itself exactly.
But it’s a lot easier to figure out where things might be going when you know what direction they’re coming from.
So today, I want to look back at a few of the big stock trends we saw in 2016. Then I’ll tell you what I think they mean for this year and beyond.
Let’s start with the major sectors of the market.
Energy (+23.7%) and financials (+20.1%) were the two biggest winners. Telecom (+17.8%), industrials (+16.1%) and materials (+14.1%) rounded out the top half.
|Energy (XLE, blue line) and financials (XLF, orange line) led markets higher in 2016.|
What this says is that investors were largely bullish on the U.S. economy’s future. They were also busy rotating into some of the areas that have been previous laggards.
As I recently told my Income Superstars subscribers, I think energy has a lot of room to keep rallying going forward.
We’ve already seen the entire sector collapse because of weaker prices, even as most other assets continued rising. And only recently have most energy names been getting their heads back off the mat.
However, when the economy does well, demand for energy goes up. Thus, if you’re optimistic about future global growth, energy is a great way to play that.
At the same time, energy prices would also rise under many “orange swan” type events — including geopolitical conflicts — while also providing a solid hedge against future bouts of inflation.
And unlike gold and silver, most energy-related stocks do pay solid income streams along the way.
This is precisely why I have kept such a large allocation to energy in the real-money Dad’s Income Portfolio that I share with my readers, and why we have additional energy plays in the Dividend Superstars model portfolio.
Meanwhile, I think the financial sector is a different animal entirely.
Speaking of financials, President Trump is hiring the wealthiest Cabinet in U.S. history. If appointed, they will have to divest their holdings that pose a conflict of interest, and then reinvest the money in government-approved investments. But they may be in danger of losing access to this lucrative tax loophole. Learn all about it later today here.
There is no doubt that higher interest rates and the possibility of less regulation are both positives. But I will be more selective when recommending names from this group because a lot of the future has already been baked into prices.
Meanwhile, healthcare ended up being the worst sector in 2016 — posting the only negative return (-4.4%). Real estate, which recently became its own (11th) sector, was essentially flat.
As far as big individual winners among S&P 500 companies — Nvidia (NVDA) was the best performer (+224%). The next three best were all related to resources: Oneok (OKE), Freeport-McMoRan (FCX) and Newmont Mining (NEM).
|NVDA was 2016’s big stock winner, with a 224% calendar-year gain.|
(JR Crooks wrote to you yesterday about FCX. His favorite trading indicator says FCX is one of 3 Stocks to Trade Soon.)
OK, that’s largely capital-appreciation potential. What about income?
In looking back at the dividend numbers from 2016, things were good … but not like some of the slam-dunks we saw in a few other recent years.
For the fourth quarter, S&P 500 dividend payments rose 5.9% from the same period a year earlier. They also set a new record, exceeding $100 billion for the first time.
Among the companies that raised their payments during the quarter, the average increase was 11.71% vs. 10.14% in the third quarter.
For the full year, the average dividend increase was 10.51%. Not bad, but not nearly equal to the 13.08% we saw in 2015 or the average 17.5% hike in 2014.
We also had a rise in dividend cuts, which brought overall dividend growth way down.
In 2017, I expect another banner year for total payments to shareholders. That would mark the sixth-consecutive record.
High levels of corporate cash remain the biggest reason for solid dividends, and we could see an even bigger influx if the Trump administration gives U.S. companies good reason to repatriate money that is currently sitting offshore.
Tax rates are one final wild card, however. If rates go down, executives may also be more inclined to give themselves (and shareholders) bigger distributions.
The bottom line is that last year was great for just about everyone, whether you chose cyclical companies … dividend-payers … or more-speculative plays.
For this year, however, I am taking a much more conservative stance. I have already recommended banking a lot of profits in my newsletter, and my new recommendations will focus on stable companies with reasonable valuations and solid dividend histories.