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Stock Market Sectors to Watch in 2018

by Jan 22, 2018

It’s been 2018 for nearly a month already, so we can start having serious discussions about which stocks are doing well and which are performing poorly in 2018.

Some things we can be confident about—2017 was an exceedingly good year for stock market investors, and every indicator is 2018 will be more of the same, if not better. We also know President Trump’s tax reform will go into effect this year, and the winners and losers from the new tax system are starting to show themselves.

Here are the main stock market sectors to watch in 2018.

Financial Stocks

Finance is booming under President Trump. That’s for a number of reasons: stronger economic conditions overall, higher interest rates, and the promise of more lax regulation, among other things.

Just look at the S&P 500 Financials Sector Index (SPF), which covers all the S&P 500 stocks categorized as “financial.” The Index is currently at 490.98, up 36.5% since Trump’s election.

The SPF includes heavyweights such as Berkshire Hathaway, JP Morgan Chase, Bank of America, and Citigroup—so it’s a bellwether for the country’s biggest financial companies.

These stocks have followed the Federal Reserve by raising interest rates—for borrowers, not savers. That means profits, and stock prices, should be even higher in 2018.

Manufacturing: Stock Market Sector to Watch in 2018

Trump promised his policies would help revive America’s manufacturing sector. So far, the proof is in the pudding—US manufacturing output in 2017 was its highest since 2011, driven by a weaker dollar and strong domestic and global demand. Those trends should only continue, with the US economy expected to grow by 2.5% in 2018—the same rate as in 2017.

A few American manufacturers are performing particularly well. Caterpillar (CAT), the world’s leading manufacturer of construction and mining equipment, has benefitted from the broader growth of the country’s building and natural gas industries. Caterpillar’s stock is up 79% year-on-year.

AGCO Corporation (AGCO) is another manufacturing stock worth taking a look at. The Duluth, Georgia-based manufacturer of farm equipment was one of the darlings of 2017, gaining 16.7% year-on-year.

Now trading at $72.62, AGCO is primed for a strong 2018. The company projects 2018 revenue of $9 billion—which is entirely possibly given strong global economic conditions.

Kaiser Aluminum Corporation (KALU) is another stock we we’re watching closely. Kaiser is a California-based manufacturer of specialty aluminum. Its products are used in everything from electronics to aerospace equipment—not to mention the defense industry, which is booming under President Trump.

Kaiser’s stock has gained 45% year-on-year and is now trading at $114.91. It’s also an enticing dividend stock, with the company’s Board of Directors recently announcing a cash dividend of $0.55 per share, a 10% increase over the previous quarterly dividend. No wonder manufacturing is one of our stock market sectors to watch in 2018.

Small Cap Stocks Should Boom

Small caps are another stock market sector expected to perform well in 2018. Defined as companies with market capitalizations ranging between $300 million and $2 billion, small caps have enjoyed good times under President Trump.

Just look at the Russell 2000 Index (RUT), which is devoted to small-cap stocks. The Index has gained 24.4% since Trump took office, proving the president’s regulation and tax-slashing agenda is benefiting more than just the billionaire class.

Coming into effect in 2018, the new GOP tax bill should give these companies an extra boost. Small caps tend to pay higher tax rates than the largest US companies. Accordingly, they have the most to gain from lower corporate tax rates.

Under the previous tax rules, companies on the Russell 2000 paid a median corporate tax rate of 31.9%, compared to the 28% paid by the larger multi-national companies on the S&P 500. According to Yahoo Finance, the median tax rate for the 30 mega-cap stocks on the Dow Jones Industrial Average is even lower—23.8%.