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T. Rowe Experts See Stock Market Rising, Economy Growing In 2017

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Mutual fund company T. Rowe Price has a positive outlook on the economy and stock market, tempered by unknowns about the Trump presidency's impact in these areas.

The risk of recession is low next year, the U.S. economy should continue to grow at a 2% clip and the U.S. stock market seems reasonably valued with a current forward price-to-earnings (P/E) ratio of 16.8, said the experts at T. Rowe Price ( TROW ). The big fund company, with $812.9 billion in assets under management, gave its views at its 2017 Global Market Outlook in New York Nov. 17.

T. Rowe's chief U.S. economist Alan Levenson said the U.S. economy's expansion "has room to run" and forecast gross domestic product will grow 2% next year and possibly another 2% in 2018 depending on the policies enacted by the new Trump administration. He said the threat of recession next year is "vanishingly low," but the possibility increases in two to three years.

Trade And Immigration

"It's difficult to discern what the president-elect will do as president," said Levenson. "There is some hint that the line on trade has softened from what it was during the campaign, but on immigration it's hard to tell."

The appointment of Jeff Sessions as Attorney General leads him to believe that a hard line will be pursued on immigration and there is no evidence that they will back away from that. Levenson said that trade restrictions, such as renegotiating the North American Free Trade Agreement, and a tough immigration regime would be more negative for the economy and have a greater effect to the downside earlier in the year than tax cuts and fiscal stimulus would have to the upside.

However, he suggested that President-elect Trump might be getting the message that he'd be doing lot of damage to U.S. businesses and jobs by imposing immigration restraints.

Tax Reform

"If I could confidently take that off the negative side of the ledger, that would make me feel better about next year, but right now there is a lot of uncertainty," the economist said. "I have a lot more confidence on tax reform than on the spending side, because the GOP wants tax reform too."

Larry Puglia, the portfolio manager of $32.6 billion T. Rowe's Blue Chip Growth Fund ( TRBCX ) as well as its U.S. Large-Cap Core Growth Portfolios, said the market is reasonably valued based on the 25-year averages of a number of traditional measures of the S&P 500. The forward P/E ratio was 16.8 on Sept. 30, compared with the 25-year average of 15.8. Although the market has moved up since the election, it's still fairly valued, he said. Price-to-book is 2.6 compared with the average of 2.9, and the dividend yield is 2.2% compared with the average of 2.0%.

"Valuation is not unreasonable and should not preclude the market from going up," said Puglia. "Investors should follow a pattern of consistent investing. We don't think we're in a bubble."

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Favors Technology, Financial Stocks

He said parts of the market had gotten expensive, such as utilities, telecommunications and consumer staples, but they had corrected significantly and are no longer extended. Still these are not areas he favors. He likes information technology, financials, health care and industrials. However, industrials have had a big run up since the election and health care remains controversial as the fate of ObamaCare and Medicare remain uncertain.

Puglia said small-cap stocks rallied hard after the election and now large-cap stocks look more attractive. And large-cap growth looks more attractive compared with large-cap value stocks.

With stock dividends yielding nearly the same as the 10-year Treasury bond, about 2.2%, Puglia said that makes stocks more attractive than bonds.

Bond Yield Under 5% OK For Stocks

As for rising interest rates, when 10-year Treasury yields are below 5%, rising rates have historically been associated with rising stock prices.

"When yields move up, stocks perform well too. That's what the analysis says," said Puglia. "Few people think Treasuries will move above 5%, so that means we have a lot of running room for the rates to go up and for stock to do well."

"I think this election is potentially quite important," said Puglia. "The economic policy proposed by Trump, such as cutting tax rates and lessening regulation and an infrastructure program could have a favorable impact on stocks and could bring a long bull market. But there's a lot of uncertainty, because we have to be careful not to foment a trade war."

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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