October 2018

Three Key Themes for 2018

By Tim Courtney, Chief Investment Officer, CIMA®

As we move into the fourth quarter of 2018, we look back on an interesting – and sometimes odd – year. It has been quite a bit different than last year’s smooth ride higher, as we saw a correction early in the year followed by a fairly narrow recovery. In this article, we discuss a few reasons for this and also look ahead into the final quarter of the year.

1. Tax cuts: It is no secret that corporate tax reform has spurred earnings growth¹ in the U.S. markets. What is interesting about this year in particular, however, is that because the market anticipated this tax reform before it even occurred, it frontloaded much of the price gains into late 2017 and January 2018.

Looking forward, we expect earning levels to continue to grow through the end of the year and into 2019. We’ll be monitoring for potential changes in government leadership and how this might impact further updates to tax law and potentially earnings, but overall, earnings growth has been strong. Barring a very unusual end to 2018, we believe we should set another S&P 500 earnings record this year.

2. Trade talks and tariffs: Continued talk of trade renegotiations and tariffs have put a lot of pressure on international investments, causing some slowdown in global growth². While there has been talk about recalibrating trade deals between both North America and Europe, the focus remains on China – and China is feeling the brunt of the effects³.

Unlike many countries, the U.S. economy is much less driven by exports⁴, so it doesn’t stumble as much when tariffs get involved. While certain sectors and industries find themselves facing some problems (most notably agriculture⁵), the market’s reaction to trade disagreements shows it has much more confidence in the U.S. While we don’t expect the focus on China to lift anytime soon, we believe markets in much of the rest of the world will recover as agreements are ratified.

3. Strong, concentrated growth: We’ve had strong growth for the first three quarters of this year, with the latest gross domestic product (GDP) rate coming in at 4.2 percent⁶ for the second quarter. However, the stock market has been very selective as much of the share price growth has been concentrated in the technology and health care sectors⁷. Large sectors like financials, industrials, and basic materials continue to be somewhat idle, which is odd considering the amount of overall growth. We believe markets will likely begin to lift all these sectors alongside their faster-growing peers. In the meantime, as investors, we should be looking for investment opportunities in these more reasonably priced sectors.

Even 10 years into the recovery we believe economic fundamentals remain strong. Looking ahead, we’ll be monitoring the above mentioned items as well as what the Federal Reserve will do with interest rates and how this might affect the U.S. dollar⁸.

In conclusion, though the year has been a bit peculiar, it certainly hasn’t been a bad one for markets. After all, we’re currently still in one of the longest bull markets⁹ in history. We continue to be optimistic as we round out the year and remember that, despite the headlines, we need to focus on fundamentals and having a diversified, disciplined strategy to ensure our portfolios are prepared regardless of what lies ahead.

Sources:
1 Yahoo Finance – SPDR S&P 500 ETF (SPY)
2 CNBC.com – US and China could soon prompt a ‘big slowdown’ in global growth, former bank regulator warns
3 BBC – China accuses US of trade bullying as new tariffs imposed
4 The Global Economy – Exports, percent of GDP
5 CNBC.com – US farmers could take a significant hit from trade war
6 MarketWatch – Second quarter even stronger than it first looked: GDP raised to 4.2% from 4.1%
7 MarketWatch – Opinion: Beyond tech: How other sectors are driving the stock market
8 Investopedia – How the Fed fund rate hikes affect the US Dollar
9 CNBC.com – It’s the longest running bull market, depending on who you ask

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