2018 Market Outlook

The stock market guru’s have written some very bullish market outlooks for 2018. GMO’s commentary was the most bearish. Jeremy Grantham, who has been called a perma-bear (always bearish), warned that the market is in the final phase of a bull market. He believes that the stock market has entered the speculative phase, which will ultimately lead to a 50% crash. The Dow Jones Industrial Average just crossed 25,000, and it is newsworthy because the pace of the last 1,000 point move was the fastest in history.

As always, Jim Cramer is very bullish on stocks. He said that we are not in a bull or bear market, but called it a beast market. Companies now have a major incentive to grow their business in 2018. With the corporate tax rate dropping from 35% to 21%, there is going to be even more money spent on capital expenditures. Bob Doll, who is Nuveen’s chief equity strategist, predicts that many companies will increase capital expenditures over stock buybacks.  Global expansion should continue, and U.S. GDP growth has a very good chance of reaching 3%, and unemployment is on pace to the lowest level in nearly 50 years. With the unemployment rate already at historical lows, businesses are going to have a hard time finding qualified workers. This, in turn, would cause in increase in wages, which will lead to higher inflation. If higher inflation doesn’t cause interest rates to rise then Jeremy Grantham will be correct in his forecast of the market melting up before crashing.

Another market outlook that I look forward to reading every year is from Bryon Wien. Bryon is vice chairman of Blackstone Advisory Partners, and his predictions mirror Jeremy’s. He predicts that, “U.S. economy has a better year than 2017, but speculation reaches an extreme and ultimately the S&P 500 has a 10% correction. The index drops toward 2300, partly because of higher interest rates, but ends the year above 3,000 since earnings continue to expand and economic growth heads toward 4%.” He also believes that inflation will become an issue and interest rates will rise. He added that energy prices are headed higher because of continued world growth and unexpected demand.

I’ve maintained a very positive outlook on equities and I have largely avoided fixed income bonds. I’ve been waiting for the past three years for interest rates to rise, but they haven’t budged. This has been good news for my clients. I believe that artificially low interest rates are the reason why the stock market has been vertical since the election. The economy was already doing well before the election and the “Trump Bump” added another 10-15% to market returns. Love him or hate him, President Trump’s legislative victory on tax reform is largely responsible for the recent market gains. My outlook hasn’t changed because it’s a new calendar year. I’m continuing to avoid fixed income bonds until interest rates rise.  As always, I prefer investments in the Financial and Technology sectors, but for the first time, I have added new investments that I believe will do well in a higher inflationary environment. I also expect a pause in the market at some point as the S&P 500 has set a record for consecutive months without a loss and it’s the longest streak without a 3% correction.

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