Now that 2016 has ended and 2017 has begun, it is important to reflect on what has been seen and what should be expected in the year ahead. The Dow Jones Industrial Average (DJIA) closed out 2016 up 13.4% at 19,762.60, outperforming the 9.5% gain for the S&P 500 and the 7.5% gain for the Nasdaq. One sector that turned out driving the cart was the financial sector. Huge post-election gains under Donald Trump’s expected lower regulations and pro-business stance driving interest rates higher helped the financial sector.
While past year gains are important, one issue to consider is whether huge gains up front effectively steal gains from the future. 24/7 Wall St. reviews each sector and component within the Dow each year to derive target prices ahead. The 19,700 Dow target for 2016 came within less than 0.5% of being accurate, and that forecast was made without ever factoring in Trump/Clinton into the mix.
While there is a path to Dow 22,000 for late 2017 or in 2018, the first view is quite mixed on the financial sector. It used to be that for the market to rally you had to have financial sector participation. That changed in the years after the recession. What should be considered now is that some of the financial stocks peaked early in December and with big double-digit gains since the November 8 elections.
Whether these ran too much in too short of a time remains to be seen. On the fundamental side of this, a pro-business administration that does not attack the financial giants sounds good on the surface. Less regulation, more loaning, more trading and less compliance spending sound positive for earnings. And higher net interest margins and the ability to have higher fees sound good for earnings. Still, the question is what can actually get passed by Congress and signed by Trump as president versus what is hoped for.
Unlike the five financial giants still trading under book value, these five financial stocks, out of the 30 Dow components, are all above book value. These five also have a total index weighting combined of almost 21% of the total index. Here is a review of the five financial stocks that make up the Dow.
This credit card giant spent most of 2016 in the dog house. American Express Co. (NYSE: AXP) has faced serious account losses from the likes of Costco and elsewhere, but a 16% gain the fourth quarter alone allowed Amex shares to generate a return of 8.6% in 2016, with a $74.08 per share close on the last trading day of the year. Maybe all the rising interest rates will allow Amex to generate higher interest income from its credit card balances that get carried over by its clients.
While its shares recovered to a positive gain in 2016, the year-end consensus analyst target price of $72.88 would imply downside risk of −1.6%. Fortunately, its 1.7% yield could save the day and make for a whole 0.1% total return in 2017, if the analysts on average managed to get their calculations right.
It’s very possible that American Express could have seen an even stronger 2016, but with the loss of Costco and no real replacement in sight, Amex might find itself without a paddle when it starts comparing year-over-year numbers later in 2017.
On the other hand, if the Trump rally persists, Amex could continue to push forward along with these other financial stocks. Ever more investors are rotating their portfolios into the financial sector to capitalize on this incredible growth. In just the past six months alone, this company is the third-best performing Dow stock, only beaten by Goldman Sachs and JPMorgan.
Warren Buffett is the largest holder of Amex shares, with over 16% of the shares outstanding, and he has been for years. Some analysts are far from enthusiastic here: Stephens issued a $65 target late in 2016, and RBC’s new target from the first week of 2017 is just $60.