2018 Outlook: Unprecedented Territory
Major macro factors affecting the economy and financial markets over the next six to twelve months include tax reform, U.S. earnings growth, economic growth, Federal Reserve policy, and geopolitical uncertainty.
Each quarter, the Raymond James Investment Strategy Committee completes a detailed survey sharing their views on the investment environment, and their responses are the basis for a discussion of key themes and investment implications covered in this quarter’s Investment Strategy Quarterly. Read an overview of the key themes below, or download the entire publication for a more thorough view of the markets and the economy.
- “The tax bill is not expected to add much to GDP growth over the next ten years, but late additions to the final bill should add a little to growth in 2018.”
- “A tight job market and slow labor force growth will be binding constraints for economic growth, but we could see rising wages lead to a more efficient use of labor over time.”
- “The leadership transition at the Fed should be smooth, but the monetary policy outlook is more clouded beyond the middle of the year, just as the risks of a policy error start to mount; personnel changes are expected to lead to a lighter regulatory outlook.”
- “The pace of interest rate increases is going to be gradual and data dependent. Base case, we may get two rate increases for 2018; it could be more, it could be less, depending on what the data tell us.”
– Scott Brown, Ph.D., Chief Economist, Equity Research
- “The bigger story last year was the limited amount of downside, and 2017 is right up there with 1995 as the year with the lowest drawdown. We’ve gone about 400 calendar days now without a 3% dip in the S&P 500 on a closing basis. That’s an all-time record so we are literally in unprecedented territory.”
- “Next year is going to be more volatile, and we’re going to see more downside than this year. That’s about the only guarantee I can give.”
– Andrew Adams, CFA, CMT, Senior Research Associate, Equity Research
- “Our bullish tone remains intact, given the normal pullbacks that are likely to develop at some point. The general markets remain strong with firm pillars of support in place.”
- “If you look at the pillars of support, and if you back that up with technical support, you can’t come up with any case where this market is going to roll over any time soon.”
– Michael Gibbs, Managing Director, Equity Portfolio & Technical Strategy
- “When I look at 2018, it’s actually all about reform and change: tax reform, labor market reform, and economic change.”
- “Brexit will occur, but it’s going to happen over a longer period. It is going to be a bit better than some of the still general pessimism about the U.K. economy out there at the moment.”
- “France’s Macron has exceeded expectations thus far. Be it tax changes, progress on labor market changes, or even getting the bakers to bake their bread seven days a week and not six, there’s lots of decent progress there.”
- “The ECB is going to remain loose. They are where the Fed was three or four years ago. In 2018, they will do slightly less quantitative easing, but it’s not going away.”
- “Number one on my list of bigger geopolitical concerns would be a world trade blow up, emanating from a strong dollar, leading to China and the States falling out. Then it would be something silly from North Korea. I think China has got them under its thumb, but obviously North Korea is a rogue state and it’s hard to do that. Number three would be the Middle East. I’m not so concerned about that versus the former two.”
– Chris Bailey, European Strategist, Raymond James Euro Equities*
U.S Fixed Income
- “The curve is telling you something. It’s telling you investors are not scared. Financial conditions, more broadly measured—forget just global interest rates—are as loose as they’ve been since 2008. This is not a tight market. And that absolutely has major effects on risk asset allocation. Central banks have modified corporate behavior and they’ve modified investor behavior. And to suggest otherwise, I think, is wrong.”
- “The high yield markets are not a hedged equity risk, they are an equity risk at this point. When I look at our portfolios, we typically have a very high negative correlation to risk assets. With credit spreads where they are, I don’t think a “balanced model” using high yield or other yield vehicles in credit is going to hedge against a drawdown in equities.”
– James Camp, CFA, Managing Director of Fixed Income, Eagle Asset Management*
- “In 2017, we had very little volatility in the bond market. The 10-year Treasury had a low yield of 2.05% and a high yield of 2.62% (57 basis points). That is the lowest volatility in the 10-year since 1965 when the yield fluctuated from a low of 4.17% to a high of 4.67% (50 basis points).”
- “Global interest rate disparity continues to be a tailwind for bond prices. The German 10-year bund is currently at 0.415%, the Japanese 10-year is currently at 0.039% and the Swiss 10-year is currently at -0.187%. These are three of many examples that could be used. This should continue to push money to U.S. debt benefiting Treasury bonds.”
– Nick Goetze, Managing Director, Fixed Income Services
Energy and Oil
- “Our main near-term geopolitical concern would be Venezuela. If Venezuela were to have a full-scale governmental and societal collapse, that’s 1.5% of global oil supply that would be at immediate risk. And a lot of those barrels go directly to U.S. refineries. A second concern is Libya. Due to the continued militant activity, there is a meaningful chance that oil shipments may be disrupted.”
- “In the last 12 months, Saudi Arabia has actively collaborated as part of the OPEC oil production restraint coalition, notably working with its traditional adversary Russia. They have managed to work together on a common economic agenda which is raising oil prices, and they have largely succeeded in doing so.”
– Pavel Molchanov, Senior Vice President, Energy Analyst, Equity Research
- “We need more houses. Tax reform isn’t going to affect the big picture for housing. We don’t need any more apartments, but we do need single family homes. We have inflation in building real estate.”
- “The consumer is having trouble because his income isn’t growing as fast as the cost to build his house.”
- Demand is always stronger as you go down in price and as you move down price point, the percentage of renters is going up. We just can’t get owner-occupied housing to lower income, middle income America.”
– Paul Puryear, Director of Real Estate Research, Equity Research
- “What we saw industry wide last quarter was an outflow from long/short equity strategies, with the reason being the reduction of equity market exposure. I think what you’re beginning to see is investors getting a little bit skittish. And on the other side, we saw large inflows to global macro and managed futures strategies. Again, supporting this trend of expected increases in market volatility.”
- “Within Raymond James, we have seen strong flows to our newly launched activist strategy. Activist strategies generally are idiosyncratic, with the fund managers maintaining highly concentrated positions in order to effectuate change at the particular company. Activist strategies can be hostile in nature, and those tend to be the type you see in the headlines, but this particular manager employs a friendly activist methodology to enhance shareholder value.”
– Jennifer Suden, CFA, CAIA, Director of Alternative Investments Research
*An affiliate of Raymond James & Associates and Raymond James Financial Services.
All expressions of opinion reflect the judgment of Raymond James and are subject to change. Past performance may not be indicative of future results. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Investing involves risks, including the possible loss of capital. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.
Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. Alternative investment strategies involve greater risks and are only appropriate for the most sophisticated, knowledgeable and wealthiest of investors. You should only invest in managed futures if you do not require a liquid investment and can bear the risk of substantial losses.
While interest on municipal bonds is generally exempt from federal income tax, it may be subject to the federal alternative minimum tax, or state or local taxes. Profits and losses on federally tax-exempt bonds may be subject to capital gains tax treatment. In addition, certain municipal bonds (such as Build America Bonds) are issued without a federal tax exemption, which subjects the related interest income to federal income tax. High-yield (below investment-grade) bonds are not suitable for all Investors. When appropriate, these bonds should only comprise a modest portion of your portfolio. Asset allocation does not ensure a profit nor protect against loss. The S&P 500 is an unmanaged index of 500 widely held stocks. Investors cannot invest in it directly. The performance noted does not include fees or charges, which would reduce an investor’s returns.
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