Stock funds seemed only slightly less frenetic than President Trump setting policy in his first 100 days, as the average domestic stock fund rose 1.83% in January, padding gains of 1.46% in December and 10.81% in 2016.
World equity funds did even better in January, advancing 3.86%, according to Lipper Inc.
Taxable bond funds rose 0.76%, while municipal bond funds rose 0.46%.
The S&P 500 rose 1.90% last month.
Not all of the young year's gains are attributable to the new president and new Congress, say stock fund managers and strategists.
"Regardless of who was elected, the economy was already improving," said Kimberly Scott, lead manager of $2.4 billion Ivy Mid Cap Growth ( WMGAX ) and co-manager of $288 million Ivy Mid Cap Income Opportunities ( IVOAX ) funds. "The trajectory of corporate profits had already turned up. The outlook for corporate profits for the end of 2017 into 2018 was already quite strong. The policy changes concerning taxes, repatriation of overseas corporate cash (and) unwinding some onerous regulations that President Trump talked about could boost corporate profits more. But the economy was already getting stronger."
And mutual fund professionals expect the uptrend to continue this year.
"The market could go in two very different ways," said Omar Aquilar, Charles Schwab Investment Management's chief investment officer of equities. "On the one hand, there is a very powerful combination of factors that could translate into record levels for equities."
On the other hand, the market could go south. "The attempt at reforms (of taxes, corporate cash repatriation and regulatory burdens) could increase the federal budget deficit," Aquilar said. "There is a potential for trade wars. Emerging markets are still landing. A strong U.S. currency could hurt exports. Those headwinds could backfire into our economy and markets."
On balance, Aquilar is guardedly bullish. "On a net basis we will see the market trend up," he said. "But it will be volatile."
Scott is favoring stocks in sectors that typically benefit at the outset of a rally. "Many think we're in the midcycle of a recovery," she said. "But we had a significant corporate-profits recession. So to me this feels like an early-stage economic recovery, and that's when you want to shift more asset weight into technology, financials, energy and industry."
Consumer discretionary is usually part of that early-stage recovery party. But this time brick-and-mortar retailers are battling digital retailers. Brick-and-mortar retailers are being forced to spend on their own websites and low-cost delivery services, Scott says, which will continue to sap their earnings.
January's Winners, Losers
Large-cap growth mutual funds' 4.10% gain on average in January led all U.S. diversified stock fund categories.
Yet investors were still jittery enough at times to drive precious-metals funds, a defensive category, up 14.94% last month, higher than any other sector. That beat basic-materials funds, which gained 7.31% .
Latin American funds paced foreign stock fund categories by tacking on 7.67% .
Taxable bonds were led by flexible-income funds 1.61% gain. Treasury funds inched up 0.36%.
Trailing precious metals and several other sector fund categories, tech funds notched a 5.13% January gain.
IPG Photonics ( IPGP ) is a technology name that John Barr, manager of $60 million Needham Aggressive Growth ( NEAGX ) - whose 9.32% average annual gain over the past 10 years topped 96% of its small-cap growth rivals tracked by Morningstar Inc. - likes in a market poised to continue higher but with volatility. The company makes fiber-optic lasers, which can be used for cutting and welding in industrial applications. As costs fall, laser systems become increasingly attractive, especially in welding, Barr says. "Big automotive makers are quite interested in using this for welding," he said.
Revenue grew 19% and 17% in the two most recent years. Earnings grew an average of 18% annually from 2014 to 2016. "It has a long runway ahead, with great returns and great management," Barr said.
PDF Solutions ( PDFS ) is another tech name Barr likes. The firm produces software that's the core of electrical testing of newly made semiconductors. It has the potential for taking share from more conventional optical testing systems, Barr says.
Two major chipmakers signed on as customers in 2016. PDF's service is delivered on a subscription basis. "So it has high margins and could double company earnings" in the near term, Barr said, especially if it wins customers in China as the Middle Kingdom builds out its own semiconductor manufacturing industry between now and 2020.
Ivy's Scott likes MercadoLibre (MELI), an Argentina-based online retailer that offers an electronic payment service. "It's still in an earlier phase of development than Amazon (AMZN) is here," said Scott. "There is no reason to think that demand for online buying and payment will not be as attractive to Latin Americans as it is in the U.S. and Asia."
Video-game publisher Electronic Arts (EA) is another of Scott's favorites. The video-game publisher benefits from a console-upgrade cycle and the shift to digital game downloads , which carry higher profit margins, as IBD has reported. Scott says now, "I continue to like the tremendous changes in the products and innovation there. They make games that consumers love. And the way that these products are developed and distributed digitally is such a profit enhancer. We think that story continues."
Among financial services stocks, Scott likes regional banks such as First Republic (FRC) and Signature Bank (SBNY), which should benefit from rising rates and from a reduction in their regulatory burden. Trump targeted the Dodd-Frank Act for review on Friday.
IBD'S TAKE: Midsize regional banks have gotten a boost from congressional moves to raise the threshold of the Dodd-Frank Act's systemic risk designation. The existing rule applies to banks with at least $50 billion in assets, subjecting them to costly regulations. As IBD recently reported, Congress is looking at raising that to $250 billion .
Scott also likes MarketAxess Holdings (MKTX), an electronic bond-trading exchange that claims cheaper transaction costs than traditional investment-bank bond trades, easier odd-lot trading and specialization in corporate credit. "There are others trying to do this, but none has gained the traction that MarketAxess has," she said.
Amid the rally in energy stocks, Stephen DeNichilo, co-manager of $2.9 billion Federated Kaufmann Large Cap (KLCAX), likes small-cap Independence Contract Drilling (ICD). The company offers customers of energy exploration and production very sophisticated drilling rigs. "They're on the leading edge of what E&P companies want," DeNichilo said. "They have only 12 working rigs, so essentially they are fully utilized. They have leverage to the U.S. shale-pad drilling rally. They have a clean balance sheet. They are trading below their $10-a-share replacement value. And they could be a takeout candidate."
In addition to trading below 10, earnings per share growth has declined at triple-digit paces the past four quarters.
Among industrials, DeNichilo likes Dycom Industries (DY). "We like long-term investment themes," DeNichilo said. "Dycom is the largest specialty contractor for fiber-(optic cable). They're the only national specialty contractor that puts fiber into the ground at a time when AT&T (T), CenturyLink (CTL), Charter (CHTR), Verizon (VZ) and other (telecoms) are about to ramp up."
That cycle will be sparked, DeNichilo says, by AT&T embarking on a massive plan to lay fiber so the telecom giant can offer customers high-speed internet service. "Their plan is to bring 1-gigabit speed to (at least) 12 million customers by 2019," DeNichilo said. The industry has seen that when dramatically higher speeds are offered at the same or comparable cost, customers switch providers. "Competitors will have to follow," he said. "This will be a big cycle for Dycom. Also, fiber investments could be part of any large infrastructure (upgrade) plan by the government."
At the average U.S. broadband speed of about 18 megabits, downloading a two-hour movie takes more than 10 minutes. It takes eight seconds via 1-Gig fiber, according to fastmetrics.com. And AT&T's speed upgrade can be achieved solely through street-side fiber, and will not require any in-home rewiring or cable replacement, DeNichilo says.
Dycom's earnings grew an average of 74% annually over the past three years. "Despite earnings growth way above the market, they are trading below the market multiple," DeNichilo said.
DeNichilo also likes Martin Marietta Materials (MLM). As the U.S. economy heats up, demand for construction aggregates will grow. "Even without Trump's Mexican wall, nonresidential construction - which is the bulk of aggregate consumption - is still below its 55-year normal level," he said. "This company has essentially doubled earnings per share over the past three years, so its outlook is fantastic whether there is a (federal government) infrastructure plan or not."
Ivy's Scott likes water-heater-maker A.O. Smith (AOS). "There isn't a lot of cyclicality in their business," Scott said. "Homeowners have to replace their heaters every 10 to 12 years. And they have a growing business in China for water heaters and water-purification systems. It's a nice growth engine for Smith."
Smith's average annual earnings growth rate was 24% from 2014 through 2016. "They're a consistent grower and reliable payer of dividends," Scott added. The company's dividend yield is 1.1%. "We're not a dividend fund, but it's nice to have on top of everything."
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of NASDAQ, Inc.