3 Predictions for 2018
December 5, 2017, 9:55 am
Smart investing is a matter of anticipating the future. While nobody has a 100% accurate crystal ball, every time we can forecast the broad strokes as well as the details opens up richer opportunities and better outcomes. It takes information, experience and more than a little intuition.
With so much noise in the market now, the power of prediction by analysis is more important than ever – especially given the endless possibilities that are still out there. Technology will accelerate. Drug development will push the limits of the human condition. Corporate genius will transform stagnant companies to liberate huge resources.
That’s our future. Here are three of the ways I see it coming over the horizon as 2017 passes the puck to 2018.
No recession, but a correction is possible. Let’s start with the biggest binary bet of all: wealth creation instead of wealth destruction. Nothing I see makes me think a prolonged economic slowdown is right around the corner. Hiring remains in line with post-2008 trends or even a little accelerated as new business models finally take over from the outmoded industries that dominated the landscape of previous generations. Inflation is benign. And as technological breakthroughs unlock previously unimagined efficiencies, corporate earnings will remain rich enough to keep people employed.
Don’t get me wrong, there will be twists and turns in the data. Traders will obsess over fluctuations and if a bad number hits Wall Street in a fragile mood, stock prices will go down. But unless the world faces a completely unforeseen shock — a cataclysmic terror attack, a major war — the trend is strong enough to keep gross domestic product (GDP) afloat. We live in a nation that survived the 2008 collapse and a decade later it’s going to take a lot more than a few interest rate hikes to send the economy back to that place.
That said, it’s been a few years since the last significant market correction, so I’m almost counting on at least one serious dip in the indices next year. It may happen early on like it did back in 2016 or it may unfold over the summer like it did in 2015, but both of those retreats turned into serious buying opportunities before sentiment recovered. In fact, every U.S. market correction in history has turned into a chance to buy great stocks at a discount, making it extremely unlikely that 2018 would play out differently.
In any event, we’ll get a little warning before we are hit with a significant downturn.
Gridlock is neutral to net positive. While I appreciate that Washington wants to support the business community and stimulate the economy, 2017 taught us that the line between rhetoric and reality can be unforgiving. That’s why I’m not betting on any level of real tax relief, healthcare reform or infrastructure spending in 2018.
As it currently stands, I’m only weighing the odds of true tax reform at one in three for the coming year, and even if it happens, it might lift the S&P 500 an extra 100 points. Healthcare isn’t going anywhere, but as other Congressional priorities languish and the midterm elections approach, we could finally see progress on that infrastructure renewal package both parties promised us. The downside is that a lot of hope is already priced into the infrastructure stocks, so even if the money materializes for huge road and bridge projects the “windfall” may not be huge.
Fresh air at the Fed. Some on Wall Street said letting Janet Yellen leave the Federal Reserve after only one four-year term as chair — the shortest tenure at the top of the central banking world in nearly four decades — is a huge unforced error. We’ll see the long-term effects play out on a macro timeline, but where 2018 is concerned, incoming FOMC Chair Jerome Powell restarting the stalled yield curve is more opportunity than threat.
A year ago just about everyone expected that overnight lending rates would be 0.5%-0.75% higher than they are now. As the age of Yellen ends, those hopes are edging up again, giving the banks, brokerage firms and especially hurricane-ravaged insurance carriers a jolt anticipating a pure profit infusion ahead. I’m thinking we’ll see another two to three rate hikes in 2018 as Powell finds his footing.
I hope you enjoyed reading my predictions! I look forward to finding out which come true next year.