2018 (The Markets and the Economy)

2018 (The Markets and the Economy)


How many people can honestly say they predicted what would happen in 2017? The stock markets around the globe outpaced most of the so-called experts. So, what happened and what will happen in 2018?


When Donald Trump was elected president, many people speculated the markets would fall and stay down. Fortunately, markets don’t necessarily listen to the prognosticators. The markets will do what they will do. Always have, always will.


2017 marked a year with continued economic improvement on many fronts. If you go out to dinner in the Southern New Jersey area on a Friday or Saturday evening one can’t help but notice, restaurants are packed, people are spending money. The unemployment rate has dropped to its lowest in years. Some will argue the jobs people have obtained are less than desirable. I can only say regardless of the types of jobs, people are spending money. People are purchasing and leasing newer automobiles.   Going back in time, when people spend money, corporations tend to be profitable which in turn typically increases stock prices.


Interest Rates


The U.S. 10 year Treasury note practically ended 2017 where it began. The yield at the beginning of 2017 was 2.49% and 2.41% at the end of 2017. Shorter term rates however did in fact rise. The 2-Year U.S. Treasury rose from 1.19% in January to 1.89% at year end. This may have been largely as a result of our Federal Reserve raising the Fed Funds Target rate 3 times from .75% to 1.50%.


In any case, lower interest rates encourage people and business to borrow. That borrowed money tends to end up back into the economy. Also as rates remain low, stocks tend to have ongoing increased appeal.


International Markets


2017 also marked a year where Developed International Markets showed economic as well as stock market improvements. It’s been some time, since we’ve seen as much global economic and market improvement in tandem. It is speculated that approximately 40 to 45% of goods and services purchased from large U.S. Businesses are from International Economies. As these economies have improved, they have purchased more of our goods and services contributing to the end result in 2017.


Tax Cuts


I do give much of the credit to market gains to a continually improving economy. I have to guess that the gain in the markets over the last two or three months of 2017 had something to do with the 2017 Tax Cut and Jobs Act. Many people will in fact have additional funds to either consume or save. Corporations that actually do pay Federal Income taxes will see a lower rate, which typically improves their bottom lines, which may provide a boost to some stock prices.


Market Volatility


As an advisor and investor I cannot recall a time when the markets seemed to only move in a singular direction for so long. Are people now expecting this to continue? If so, how long?


What about 2018


I always enjoy listening to market and economic predictions, whether it’s from a large financial institution or through one of our media outlets. Most are bullish on 2018. Many are predicting the U.S. stock market will rise by approximately 10% and the international markets may outperform the U.S


What Do We Know or “Think” We Know about 2018


  • The Forward Price-to-earnings ratio on the U.S. stock market is approximately 18.7 and lower around most of the world suggesting the markets may not be over valued at this time. 


  • The Federal Reserve will most likely attempt to increase short term rates 2 to 3 times in 2018. If that comes to fruition, rates may still remain lower than “historically normal”. 


  • The Federal Reserve will attempt to continue to reduce its balance sheet by letting matured Treasury and Mortgage bonds “roll off” instead of reinvesting the proceeds. Many suggest this is the way the Federal Reserve will prepare for whatever the next crisis ends up being. 


  • The U.S. Treasury 2 to 10 Year Slope which is the difference between 2 year and 10 year rates decreased from 1.24% in January to .51% at the end of 2017. This suggests a flattening of the “yield curve”. This by itself does not give cause for concern, however worth noting and keeping an eye on. 


  • The economic recovery will turn 9 years old in March 2018 suggesting it’s one of the longest recoveries in history. 


  • As the world becomes increasingly digital, how will this impact the economy and the markets? Companies such as Amazon are altering retail distribution systems. 


  • Will we have Healthcare Reform in 2018?  


  • In November we’ll have Congressional elections which can either leave Republicans in charge, split The House and The Senate or change control back to the Democratic Party.  


  • We’ll have to watch what will happen with the issue of North Korea.


  • International Trade is always huge and may see alterations in 2018.


  • What surprises may be in store for us? Time will tell!


Portfolio Positioning


Besides some minor adjustments and perhaps rebalancing your portfolio, your accounts should already be in position based upon your specific current/future need for income, your time horizon and honest risk tolerance. Unless you have a significant unexpected life change, your portfolio should already be invested across the broad based asset classes of stocks, bonds and cash equivalents.   Provided you have completed and keep your Retirement Income Planning updated, you should be allocated properly.


For information on our upcoming Retirement Income Planning Workshops that will discuss many of the issues contained in this blog, please click on Retirement Income Planning Workshop.

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