By Kevin D. Mahn, president and chief investment officer, Hennion & Walsh Asset Management

1. Emphasis on US stocks over international stocks

While not abandoning international equities altogether (see Theme 3 below), I believe that it is worthy to consider overweighting US equities to start 2017 given heightened optimism for US economic growth plus accompanying US stock market growth in the new year as a result of the election of Donald Trump as the new US president, who is backed by a Republican-controlled Congress.

According to TheWeek.com, this is only the second time since 1929, the Republican Party will control the House, Senate, White House, most governorships and state houses, and decide a Supreme Court pick. One party having so much control may provide some tailwinds to stock market investors in 2017.

To this end, based on a MFS research report, it appears from the chart below that although the combination of a Democrat president and a Republican Congress has produced the best historical returns from 1961-2010, on average, for the stock market (which is defined in this case by the S&P 500 index (^GSPC), the stock market still experienced an average return of 12.1% when the White House and Congress were controlled by the same party.

Please note: The Dow Jones Industrial Average (DJIA) measures the US stock market. Figures referenced are price change only and do not include the impact of reinvested dividends. The Standard & Poor’s 500 Index (S&P 500) measures the broad US stock market. It is not possible to invest directly in an index. Past performance is not a guarantee of future results.

As a result, the psychological achievement of Dow (^DJI) 20,000 may serve as more of a springboard for the next leg of this secular bull market as opposed to being a market top for this bull market rally that some are suggesting.

2. Consider different market capitalizations to help deal with strong US dollar

Rising interest rates in the US, coupled with declining or stagnant interest rates across the rest of the globe, could result in a stronger US Dollar, despite the stated reservations of this happening by Trump. This could, in turn, put pressure on multinational US companies that derive a significant portion of their revenue overseas.

As a result of the expected US dollar strengthening, certain mid-cap and small-cap US companies, which generally have less of an overseas focus when compared to their large-cap US counterparts, may be worthy of consideration to help minimize some of the strengthening US dollar risk while still allowing for allocations to US equities in general. Certain currency investment strategies may be worthy of consideration to assist in this regard as well.

3. Don’t discount the benefits of a globally diversified portfolio

International equities, through stock allocations in international developed markets and some international emerging market, should still be a part of most globally diversified portfolios in 2017 as a result of the anticipated stimulation measures on the part of central banks across the globe in the new year needed to spur additional economic growth.

4. Understand the role of bonds in income and growth-oriented portfolios

For income-oriented investors, bonds can provide for a dependable and consistent stream of income, and principal protection when held to maturity. Bonds, whether they are municipal, government or corporate bonds, can also provide for compounded growth opportunities when the income received from the bonds is reinvested.

Additionally, for growth-oriented investors, fixed income securities can provide investors with downside protection and diversification within a growth portfolio, especially in a highly volatile market where additional, measured, short-term flights to quality are likely.

In our view at Hennion & Walsh, investors should be careful not to miss out on the income and diversification opportunities offered by bonds by trying to time potential changes in interest rates. History has shown us that trying to time the market, or time interest rate increases or decreases, can be very difficult. With this said, it is important to understand that when interest rates do increase, bond prices may fall and yields may rise. However, rising interest rates should not impact the interest that bond holders receive on their bond holdings nor should they change the ability of these investors to receive par value on their bond holdings at maturity. Bond fund investors, on the other hand, may see the interest they receive on their fund holdings change in a rising rate environment and will not receive par value at maturity as there generally is no set maturity on bond funds.

While allocations to bonds may vary based upon market conditions and investor objectives and risk appetites, certain types of bonds, from certain types of issuers, can still find a home in most investment portfolios throughout most market cycles.

5. Selectively include ‘Trump trade’ sectors as appropriate

While recognizing that President Trump’s suggested priority initiatives, based largely on his “Contract with the American Voter” at this point in time, are subject to change and may either a) take longer than expected to achieve, b) not come to reality, or c) not deliver upon the intended results if achieved, investors would be wise to consider less significant, “satellite” allocations to areas of the US stock market that many believe stand to benefit over the term of a Trump presidency. Some examples of these potentially benefiting areas include energy equipment and services, industrials, banks, defense and cybersecurity.

Disclosure: Hennion & Walsh Asset Management currently has allocations within its managed money program, and Hennion & Walsh currently has allocations within certain SmartTrust® Unit Investment Trusts (UITs) consistent with several of the portfolio management ideas for consideration cited above.