2018 OUTLOOK

The Stock Market

 

It is crystal ball time for predicting the stock market. We have often reminded our clients that while all Wall Street strategists are asked for their predictions – outguessing the outcome is almost always impossible, i.e. 2017!  The most bullish forecast a year ago – was for a 15% increase; the least optimistic was 3%.  The average forecast was a 7.5% increase.

For us, we forecast an 8% gain for U.S. stocks in 2018.  We look for stronger corporate profits due to continued strong global growth, lower corporate taxes, and slowly rising interest rates.  We do not expect another year of double digit gains and a calm market.  We do anticipate more volatility in 2018.

Potential risks are the military threat from North Korea, mid-term elections in November which have a history of causing stock declines, and an unexpected sharp rise in interest rates.  We recognize, also, that the stock market’s valuations are high and more susceptible than before to disappointing economic and geopolitical events.  The S&P 500 is now trading about 18 times forward earnings.  That price earnings (P/E) ratio is above its historical average of 16 (but well below its P/E of 28 in January of 2007).

Since timing the market is futile, as mentioned, we focus on adhering to the asset allocation guidelines that we have defined with each client.  We then concentrate/”weight” industry sectors that we feel look especially attractive.  Going forward, we still like the technology and industrial sectors.  We are currently increasing sector weightings in the energy and financials industries which we feel are attractive.

 

As is our stock style, we will continue to focus on industry leaders, companies that have strong balance sheets and in most cases, attractive growing dividends.  Our stock mutual fund approach will remain consistent – selecting and closely monitoring stock funds that we feel offer above average growth potential with below average risk (volatility) and whose performance compares favorably with their peers.  Below average expense ratios continues to be a key criteria for us.

We feel international stocks will continue to perform well over the next twelve months. Economic growth around the world should continue to be strong.  In particular, the economies of Europe are still earlier in their expansive stage as compared to that of the United States.

 

The Bond Market

 

We were pleased with the choice of the new Federal Reserve Chair, Jerome Powell.  It is believed he will not change U.S. monetary policy – that he will stick to the ongoing process of gradually raising interest rates that Janet Yellen had begun.  He has said that the Fed would proceed cautiously so as not to put the brakes on the economy.  It looks like there will be three more rate hikes in 2018, assuming inflation doesn’t get out of control.  This continuity should reassure bond investors that rates won’t spike higher.

For this primary reason, we forecast the 10-year U.S. Treasury Note to range between 2.30% and 2.75%.  We believe bond prices, as such, should increase just slightly throughout the year.  We feel our bond strategy of owning short-to-intermediate term bonds whose prices are less sensitive to changes in interest rates – will best achieve their primary roles of providing portfolio stability and relative safety of principal.