Main Street Investor’s Guide to the Best Investments for 2017

Follow this market forecast and the best investments for 2017 to protect your hard-earned money

Market forecasts for 2017 are out and the pundits are their usual overly-optimistic selves. The 16 Wall Street analysts surveyed by Bloomberg all put stocks in the S&P 500 higher by the end of the year.

Of course, nobody every predicts stocks will fall over the next year.

Even worse, strategists are notoriously bad for picking the best investments and turning points in the stock market. Wall Street overestimated the S&P 500 by an average of more than 25% during each of the three years of the dot-com bust to 2002. They also underestimated by 11% the recovery in 2003.

Trying to put a number on stocks is folly. Instead, I look at where we are and the biggest investing risks of 2017 to find the best investments for the year. Instead of trying to pinpoint exactly how high each stock will go over the next year, focus instead on protecting your money and positioning in the top stocks for your needs.

How you invest can be just as important as in which investments you put your money. I use Motif Investing for all my stock investments because I can group up to 30 stocks and buy them all with on trade. It cuts down on the fees I pay and I don’t worry as much about each individual stock.

I’ll first outline the biggest investing risks to the markets this year before detailing the best investments for 2017.

Click here to skip the risks and go straight to the best investments

Biggest Investing Risks for 2017

We’re approaching the eighth year of a bull market, that should tell you something. The S&P 500 is 241% higher than its March 9, 2009 low and this bull market is the 2^nd longest after the dot-com bubble.

Now bull markets don’t die of old age and the average market forecast of 2,357 for the S&P 500 this year may well come true.

But let’s look at some of the biggest investing risks to the market to get a better picture.

The largest U.S. stocks are trading for a price of 25-times company earnings booked over the last year. That’s a lot compared to the often-cited 16 average historical multiple and even the P/E ratio of just under 20-times over the last ten years.

Pundits can try to justify the higher price with the idea that earnings will be rising this year but the fact is that you are being forced to buy stocks for at least 30% more than you have in the past.

Let’s look at those earnings estimates. FactSet reports that analysts are projecting earnings growth of 11.5% and sales growth of 5.9% for 2017. That’s extremely optimistic when you consider long-term data.

Companies in the S&P 500 have only grown earnings by an annualized 1.6% over the decade to June 2016. Earnings only grew by an annual 7.7% in the high-growth decade to June 2007! The optimism gets even harder to believe when you consider stocks just broke a year and a half trend of falling earnings.

Let’s throw reason out for a moment and pretend analysts don’t have a horrible record of forecasting earnings. FactSet provides this graphic showing the price-to-expected earnings of sectors, that’s how expensive stock sectors are compared to forecasted earnings.

Eight of the ten sectors all trade for prices well above their 5- and 10-year averages. Healthcare and Telecom Services are the only sectors not priced ridiculously high. The 17.1 P/E multiple for stocks is 19% above its ten-year average…and that’s if you believe companies can meet high earnings expectations!

So the starting point to 2017 is looking a little expensive in stocks but let’s look at the upside and downside investing risks for the year.

Geopolitical Risks for Stocks in 2017

President-elect Trump has already signaled that China will be replacing Russia as the country’s biggest international rival. He has called out the world’s second largest economy several times as a currency manipulator and bad trading partner. Trump and other Republicans’ calls to members of the Taiwanese government further shake relations with China because the mainland claims the small island does not have sovereign rights.

I’m not saying China doesn’t take a heavy hand in its trade practices, managing its currency and economy. That’s what a communist government does after all. I’m also not saying the U.S. couldn’t do more to get better trade agreements with other countries like China.

The problem is that the incoming president might not have as much negotiating power with China as he’s used to when trying to get his way with smaller businesses. Consumers in the U.S. bought $481.9 billion in goods from the country in 2015 and businesses sold $116.2 billion to China that year. Taxes on Chinese imports would cause prices on U.S. consumer goods to skyrocket and corporate earnings could plunge.

The Chinese also hold as much as $1.24 trillion in U.S. government debt. If the new administration in Washington tries playing hardball with foreign trading partners, they may decide to sell their holdings of U.S. debt. This could cause interest rates to surge and send the economy into a recession as borrowing costs weigh on businesses and consumers.

Global trade is already struggling with the total value of U.S. imports and exports falling by $200 billion in 2015 and by another $470 billion through the first nine months of 2016. There’s little doubt that trade will again fall in 2017 as the world awaits policies in its largest economy.

Outside the potential for a trade war, there are other geopolitical risks that could weigh on stocks this year. Political and corporate espionage by way of hacking is getting more common and ISIS is still a threat in many parts of the Middle East.

Economic Risks for Stocks in 2017

While the geopolitical market forecast is decidedly one-sided, the economy in 2017 presents both upside and downside risks.

Let’s look at the upside first because all this negativity is giving me the blues.

The incoming president has promised sweeping changes to taxes, regulation and massive stimulus from infrastructure spending. Political cynics say it always easier said than done when pushing policies through Washington but maybe Trump is just the heavy-handed, bully that can get it done in one of the few times you need a bully.

The administration wants businesses to foot the bill for a lot of the promised infrastructure spending. This has failed in the past because the long-term payoff and low return from infrastructure projects isn’t very attractive to corporations. Talk is building for the tax holiday to bring money from overseas requiring companies invest a portion of it in an infrastructure bank to fund projects so this may help incentivize the spending.

American companies hold more than $2.5 trillion in cash overseas and a tax holiday could help to bring some of it back. Companies need to maintain some of that money overseas for projects but might still bring back as much as a trillion dollars.

The 2004 tax holiday didn’t boost corporate spending as much as the optimists said it would but it’s undeniable that the money was a boom for stocks through dividends and buybacks. If companies did the same thing this year, it could double the $975 billion in buybacks and dividends at S&P 500 companies booked in the year to last June. Even if that money isn’t going directly to business spending, happy investors are going to be increasing their own spending and investing.

Larger tax reform to lower corporate and personal taxes will probably take longer but could still help support investor sentiment for 2017. Whether you agree with the long-term effects of lowering taxes, it’s hard to disagree with the short-term bump in spending. The same goes for the promise of less government regulations on businesses by the incoming administration. Whether it creates a problem we’ll have to confront in the future or not, it could mean higher business spending in the near-term.

Consumer spending is strong going into 2017 with wage growth the highest since 2009 and holiday spending was up 4% from last year. Business spending has been the big detractor from economic growth but could finally turn around this year.

Against this rosy economic outlook are a few risks that could shake the stock market.

The biggest economic risk this year is the simple fact that the Federal Reserve will be working against upside forces. This isn’t a jab at the Fed but just an understanding of its role in managing the economy.

Unemployment is already low at 4.6% and businesses are having trouble finding new hires. This means new employment will have to entice workers away from other jobs by offering higher wages. That increase in wages is the biggest threat to Wall Street’s optimistic earnings call for the year. Frankly, I see no chance that companies will be able to squeeze out 11.5% profit growth against higher wage growth and higher interest rates.

The Federal Reserve has two measures that it uses when deciding whether to increase interest rates, employment and inflation. Inflation has started to tick up and employment is already strong so the central bank will find it hard to justify not raising rates at least a few times this year.

Those higher borrowing costs are going to weigh on businesses and consumers. Total debt held by non-financial corporations and households reached a record late last year. American corporations have nearly doubled their borrowing over the last decade to more than $5.8 trillion while households and non-profit organizations owe a combined $14.6 billion.

Don’t expect oil prices to rise and support overall economic growth as many have hoped. While OPEC agreed to cut production to support prices, the group is notorious for cheating on production deals. The market saw a huge spike in oil futures trading when prices hit $50 a barrel. Much of this was U.S. explorers locking in the price for 2017 oil production, meaning they are planning on drilling for as much oil as possible because they can get a guaranteed price.

That’s going to keep oil supplies high and prices could tumble. When OPEC and Russia see that their promised production cuts had no effect on supporting prices, they’ll cheat and drill for as much as they can as well.

Best Investments for 2017

As is always the case, investor sentiment will drive the markets in the year ahead. A stronger economy and earnings can push stocks higher over several years but it is always the market’s enthusiasm that decides near-term direction.

The question is then, given where we are at as well as upside and downside risks, will investors keep paying higher prices for stocks in 2017 or will they panic? Will the promise of tax reform and spending be enough to drive stocks higher even if actual policies take longer to change?

I’m not going to sit here and tell you what stocks everyone should buy. Trying to make the market a one-size-fits-all investment is the biggest problem with investing. TV shows and websites try to appeal to a mass market by saying everyone should buy a specific stock or market theme. Investing is about YOUR needs and your best investments will be different from mine.

That’s why I like to frame this annual market forecast and investment picks around different perspectives. You’ll find the best investments for 2017 depending on your needs as an investor and your own market outlook.

Best Investments for Protecting your Money in 2017

Even the rosy outlook for stocks by Wall Street is just 3.6% above where the stock market stands as I write this post. The presidential campaign scared the crap out of the markets and pundits have gone back and forth about the economy in 2017.

Getting a 3.6% return on my money if everything goes right doesn’t sound that great, especially against the risk that the stock market gives in to economic risks and crashes. Defensive investors may want to focus on protecting their money this year, wait for the markets to come down and to buy stocks at a better price later.

Most people don’t realize it but individual investors actually have the advantage over money managers and big Wall Street firms. While anyone tasked with managing another person’s investments always needs to be investing money and picking the best stocks, you don’t have that same pressure on your own investments.

This might be the single best stock market advice for the next year or two…you don’t have to invest in anything!

Which is better, investing in stocks for a chance at a 3.6% return but then getting hit by a 10% or higher loss when the market tumbles or just holding cash for the next year and not losing any money?

I’m sitting on a lot of cash in my portfolio and I’m not alone. Even against the pressure to earn returns, money managers are holding the highest cash balances in 15 years and waiting for better investment opportunities.

You can turn your stock investments into cash and get a few percentage return upside with the covered call options strategy. This is one of my favorite options strategies to reduce risk and something I’m relying heavily on in 2017.

A covered call is owning shares of stock and selling someone else the right to buy those shares for a set price in the future. Following the graphic below, if I bought a stock for $50 but am worried about it falling, I can sell a call option to someone that gives them the right to buy it for $51 a share. They will pay me money now for that option which I get to keep no matter what happens.

If the price of the shares drop below $51 then I keep the stock and nothing else happens. If the shares rise above that $51 price then the other investor buys them from me for that price. The best part though is that I still made the $1 from where I bought the stock plus I get to keep the money paid by the other investor.

Let’s look at a real-world example on shares of NRG Energy, a huge utility company that I like but that is struggling against low energy prices.

I can buy the shares for $13.47 at the time of this writing and sell someone the right to buy the stock for $12 per share. For that right, the other investor is going to pay me $3.15 per share which means I actually got the stock for $10.32 each ($13.47 – $3.15).

I will not lose any money unless the stock drops more than 23% to less than $10.32 per share. Selling these deep in-the-money calls, where the other investor buys the right to purchase the stock for below the current price, is a great way to protect your money but still have some potential for return this year.

If the shares stay above $12 per share by next January then the other investor will buy them for that amount and I will book a gain of $1.68 each or 16% ($1.68 divided by $10.32). I get a 16% gain AND a 23% downside protection in one investment! I also get to keep the 0.9% dividend paid on the shares during the year.

You can play around with the strike prices for each stock you own depending on how much protection you need and how much return you want. Covered call options are a great investment strategy when your market forecast calls for tough times ahead.

I am also moving more of my money from stocks to peer lending, one of my favorite ways to invest $1,000 now. A lot of investors are worried that default rates on peer loans will jump if the economy hits a rough patch but they miss the strength in peer borrowers.

Borrowers on Lending Club have an average credit score of 700 and make over $80,000 annually. Borrowers in the top three loan categories have FICO scores well in the 700s, own their home and have been working at the same job for years. They aren’t going to blow their credit on a $5,000 loan.

Limiting my p2p investments to loans in the first three categories (A, B, C) and on borrowers that own their home, have verified income, no accounts delinquent and debt-to-income of less than 30% gives me a historical return of 6.5% and very few defaults.

Even if loan losses increase a little on a big recession, the loans can still earn something around 6% and they are short-term (3- or 5-year) loans so will be paid off quickly. Most investors aren’t in peer loans yet but it’s one of my favorite safe investments.

Click to open a free account on Lending Club with no minimum balance

If you are looking for stock picks for 2017 but still want to protect your money, I do like healthcare and real estate investment trusts (REITs).

Shares of the Health Care Select Sector SPDR ETF (NYSE: XLV) gives you exposure to 62 companies in the sector and pays a 1.6% dividend. Healthcare was the worst performing sector last year but an aging population makes for a stronger picture over the next few years.

Real estate companies got hit last year with fears of increasing interest rates and could struggle against higher borrowing costs this year. These companies hold real assets though and pay out huge amounts of cash to investors. The Vanguard REIT ETF (NYSE: VNQ) holds shares of 157 REITs and pays a 4.8% dividend. The REIT index has consistently beaten stocks for decades and will continue to do so in the future. Invest regularly even as other investors worry about interest rates and your portfolio will do well.

This is how I am investing my money in 2017, protecting my investments and being happy with a lower return. I have done very well since 2009 and want to keep what I’ve earned. I can accept missing out on a few percentage points of upside if the stock market keeps heading higher as long as I don’t see my investments crumble in the next stock market crash.

I’ve shared all of my stocks and bond investments in my Motif Investing account. For long-term investments that don’t change much from year-to-year, I invest in five funds. I will probably sell some call options against some of these and invest more in peer lending but most of these funds won’t change much for the year.

But what should be your best investments if you believe in a rosier market forecast? What stocks should the optimistic investor buy?

2017 Best Investments for a Trump Economy

All the downside economic risks won’t mean a thing if President-elect Trump can keep investor sentiment high with headlines of his policy promises. Some of the upside to the stock market from tax reform and fiscal spending has already been built into prices but there’s enough skepticism that progress on policies will keep investors buying.

Whether you agree with Trump’s policies or not, all the market needs is enthusiasm for short-term gains to keep heading higher. Stocks are a right to future earnings but stock prices follow the short-term hopes of investors.

Some of the best investments for a Trump economy would be the hardest hit under President Obama and the most regulated industries, energy and banking stocks. Even if he can’t overturn all of the previous administration’s policies, Trump has already shown he’ll take the bite out of the Environmental Protection Agency (EPA) and banking regulation with his cabinet nominees.

Great ETFs to look at within these two sectors are the SPDR S&P Oil & Gas Exploration & Production ETF (NYSE: XOP) which holds shares of 63 U.S. energy drillers and explorers. Even after jumping 83% from where I bought shares in February for my American Future Fund, it is still a good long-term investment. American energy companies are benefiting from new rules on exporting and the U.S. could be a net exporter in the near future.

The Financial Select Sector SPDR ETF (NYSE: XLF) holds shares of 65 U.S. financial companies including insurers and banks. The fund pays a 1.7% dividend and trades for 16.5 times earnings, well under the price multiple on the stock market.

For individual stocks, I like Wells Fargo (NYSE: WFC) and Antero Resources (NYSE: AR). Wells Fargo got rocked by the accounts scandal last year but is still has a solid reputation for excellent customer service and is one of the best investments in banking. Antero Resources has struggled along with other natural gas producers but has become a best-of-breed in operating and will win out over the long-run.

One of the best investments for 2017 may not be a stock but how you invest. Besides used for reducing risks, options can also be used to make higher returns on your favorite stocks. For example, you could buy shares of Antero Resources for $24.12 each or you could pay $6.60 for the option to buy the shares for just $20 each next January.

If shares increase to my target of $29 by next January, the stock investor will make a solid 20% return. The options investor though would be able to buy the shares for $20 and book an immediate gain of $9 or a return of 36% on the original investment.

Call options do involve extra risk. If the shares fall to below $20 each then the options investor has lost all his investment while the stock investor still has some shares and can wait for a rebound so make sure you understand the risk in options investing.

A lot of the upside in these stocks doesn’t require a booming economy. All are good picks that should do well over the long-term even if the stock market hits a weak spot over the next couple of years so you shouldn’t have to worry if the economy isn’t as strong as you expect.

There’s one group of stocks that make for the best investments regardless of your economic outlook. I’ve included some dividend stocks in the other two groups but one dividend investing strategy has beaten the market consistently in good times and bad.

2017 Top Dividend Stocks

I love dividend stocks. You might as well get paid while you wait for a company’s shares to rise, right?

Besides the instant satisfaction of seeing those dividend checks hit your account, there are some powerful reasons to invest in dividend stocks. It turns out that one surprisingly simple investing strategy has beaten the stock market consistently. It could be one of the best investments for 2017 regardless of where the rest of the market goes.

I’m talking about the Dogs of the Dow strategy and the even better Small Dogs of the Dow.

The Dow Jones Industrial Average is composed of 30 U.S. stocks, real powerhouse companies like General Electric and Coca-Cola. Just these 30 companies are worth nearly $6 trillion, more than a quarter of the total worth of all U.S. stocks.

The Dogs of the Dow strategy is an annual investing rebalancing where you pick the ten stocks with the highest dividend yield, putting an equal amount of money in each. The Small Dogs of the Dow is only slightly different, buying the top five dividend stocks rather than ten.

Over the ten years through 2015, the Small Dogs of the Dow strategy has beaten the S&P 500 by 2.7% a year. That may not seem like much but amounts to an extra $2,838 on an initial $10,000 investment.

Why does the Dogs of the Dow strategy do so well against the rest of the market? A stock’s dividend yield is the dividend amount divided by price. Either a high dividend or a low price will give it a higher yield.

• A rising dividend means more cash in your pocket and signals a strong outlook for future earnings growth. Those future earnings usually lead to a higher stock price.
• A slumping stock price isn’t great but it means new investors might be getting a deal, a rare thing in today’s overpriced market. Dow companies are large enough to survive short-term financial weakness and stock prices usually rebound eventually.

I wouldn’t recommend putting all your money in just five stocks but the Small Dogs of the Dow can be great additions to your long-term portfolio. The five Small Dogs of the Dow for 2017 are:

Verizon Communications (NYSE: VZ) trades for just 13.9 times last year’s earnings, a discount of 44% to the rest of the market, and pays a 4.3% dividend yield. The company is the largest wireless carrier in the country with more than 100 million customers.

Pfizer (NYSE: PFE) trades for just 13.3 times last year’s earnings, a discount of 47% to the rest of the market, and pays a 3.9% dividend yield. Investors have worried about drug pricing over the last year and the company has had to deal with some patent expirations but the long-term upside for drug manufacturers remains intact. A couple of recent releases including drugs for breast cancer and rheumatoid arthritis could make Pfizer one of the best stocks for 2017.

Cisco Systems (Nasdaq: CSCO) trades for just 12.7 times last year’s earnings, almost half the P/E of the stock market, and pays a 3.4% dividend yield. The company is the global leader in networking equipment with a huge lead on competitors and has been transitioning into other products like cloud services.

Chevron Corporation (NYSE: CVX) felt the same pain as other energy companies last year and trailing earnings are artificially low. Expected earnings are back up to a more normal $4.66 per share which brings the stock price to about 25-times, roughly that of the market. Shares pay a strong 3.7% dividend and the company has several big projects starting to cash flow that could drive returns.

Boeing Company (NYSE: BA) trades for 24.3 times last year’s earnings, on par with the valuation on the stock market, and pays a 3.7% dividend yield. The company books sales on both commercial buyers and military orders so revenue doesn’t depend solely on one source. President-elect Trump has talked up defense spending at the same time calling out contractors for high prices so it could be something of a wash if he negotiates lower prices on military aircraft. Boeing has more than 5,600 back orders for commercial planes, representing almost a decade of production so has plenty of cash flow coming its way.

I’ve tried building out a case for the best investments for 2017 for different investors and depending on reasonable stock market forecasts but nobody has a crystal ball. In investing, it’s always best to take a long-term view depending on your goals and needs for return. Invest according to your needs and depending on your age while making minor changes to your investments each year for market forecasts. This will help you avoid some of the worst investing behaviors while still benefiting from the top stocks each year.

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