Market and Economic Trends to Watch in 2018

As we close the book on 2017, which will go down in history as one of the market’s quietest years on record¹, a few trends stand out that have kept markets calm during the second-longest bull market to date2.

When you combine accelerated U.S. gross domestic product (GDP) growth3, new profit records4, healthy consumer confidence5, synchronized global growth6 and relatively low interest rates7, we have a very favorable environment for stocks. In fact, we’re in the ninth year of economic recovery since the financial crisis8. In 2017, we didn’t even have a correction as minor as 3 percent9.

Furthermore, the worst-performing month in 2017 was March, which still had positive returns equaling approximately 0.12 percent9.

As we head into 2018, we’re hoping for similar economic and market conditions. As we make investment decisions, we will be watching the following three areas for potential disruption.

1. Interest rates. The Federal Reserve hiked interest rates three times in 2017, most recently to a range of 1.25 percent to 1.5 percent in December10. We at Exencial believe rising interest rates are a healthy sign for the economy, as it shows the market’s and the central bank’s confidence in continued U.S. growth. We would expect at least two to four more rate hikes in 2018 if the U.S. economy keeps strengthening and inflation continues to creep closer to the Fed’s long-term target of 2 percent11.

So far, the Fed’s decisions have affected short-term interest rates, while long-term rates have only modestly moved higher (the 10-Year Treasury is now close to 2.5 percent) 12. We’re monitoring to see if the market agrees with the Fed’s assessment and moves longer-term rates higher.

2. Global economic growth. In 2017, the economies of the 45 largest countries across the globe grew in sync for the first time since 20076. We expect that growth to continue in 2018, especially in the U.S.

We paid our dues from 2014 through the first half of 2016 when the U.S. experienced an economic slowdown13 and choppy markets. It’s been only a year and a half since that time, so we believe the U.S. and the world is positioned well for continued expansion.

However, we’ll be closely monitoring other countries around the world to see if this accelerated growth continues. While we do not expect any major headwinds to impede global growth in 2018, we’ll be watching for potential political risks, such as Brexit, global terrorism, geopolitical tensions, etc., that may interfere with continued growth.

3. Undervalued assets. In 2017, historically undervalued asset classes like emerging markets and international assets finally bounced back and started performing really well14. As we head into 2018, we are hoping that trend continues with small caps.

We believe small public companies have some advantages over their larger counterparts – they are nimble and should be beneficiaries of the new tax law – but they are valued at a fraction of larger caps15.
We’ll be watching small cap stocks closely next year to see if they continue trading at a discount to large cap stocks, and whether there’s justification for this trend.

While we expect the U.S. markets to continue in a period of growth in 2018, markets will eventually experience a correction as they tend to do even during periods of growth. We will keep monitoring interest rates, global growth and performance of undervalued assets as we look toward the New Year.

Sources:
1marketwatch.com/story/the-last-time-stocks-were-this-quiet-was-the-year-the-beatles-went-on-ed-sullivan-2017-12-14
2cnbc.com/2017/09/13/second-longest-bull-market-ever-aging-gracefully-but-investors-wonder-how-long-it-will-last.html
3tradingeconomics.com/united-states/gdp-growth
4www.investors.com/politics/editorials/is-the-stock-market-crazy-no-just-following-surging-profits-as…
5conference-board.org/data/consumerconfidence.cfm
6marketplace.org/2017/08/25/economy/global-economies-are-growing-together-relying-less-us-engine
7tradingeconomics.com/united-states/interest-rate
8investopedia.com/articles/economics/09/financial-crisis-review.asp
9finance.yahoo.com/quote/%5EGSPC?p=%5EGSPC
10usatoday.com/story/money/economy/2017/12/13/federal-reserve-december-decision-janet-yellen-interest-rates/946193001/
11federalreserve.gov/faqs/economy_14400.htm
12 ycharts.com/indicators/10_year_treasury_rate
13money.cnn.com/2016/01/29/news/economy/us-economy-gdp-fourth-quarter/index.html
14barrons.com/articles/emerging-markets-time-to-sell-hottest-assets-of-2017-1507326675
15finance.yahoo.com/quote/%5ERUT/

Disclosures:
Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from thirdparty sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness.

The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book.

There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 405-478-1971.

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