The bull market that has been running for nearly nine years reached new heights in 2017. The United States stock market, as measured by the Standard & Poor’s 500 Index, is up more than 21 percent, and both the Dow Jones Industrials and tech-heavy Nasdaq are even higher. International stocks also had a great year, posting gains of 27 percent. Notably, the markets racked up these gains amidst historically low volatility. December marked a record-breaking 14-month streak without a single monthly loss for the S&P 500.
With such a spectacular year now in the books, many investors are questioning what’s in store for 2018. While forecasting near-term market movement is notoriously difficult — recall that many professionals went into 2017 concerned that the bull market already was overstretched — we can look to the economic and business climate for some clues as to what the year will bring.
Even though we are several years along in the cycle, the U.S. economy still appears broadly healthy. U.S. consumer activity is strong and getting stronger thanks to lower unemployment, improved personal balance sheets and increased consumer spending, which should provide a boost to company earnings. This, in turn, should help support stock prices at their current levels and has the potential to fuel additional market gains.
American businesses also appear to be in strong financial shape. Company earnings and profit margins have been improving and are predicted to advance in 2018, which is more good news for stock prices. The companies in the S&P 500 grew their earnings by an estimated 9.6 percent in 2017, marking the highest earnings growth rate since 2011. Analysts are projecting even higher growth of 11.8 percent for 2018. Tax reform also is expected to give a boost to the bottom lines of many U.S. companies, with the financials and industrials sectors in particular expected to see meaningful increases in earnings per share as a result of the new laws.
Economic improvement has not been limited to the U.S. For the first time since the global financial crisis 10 years ago, all 45 countries monitored by the Organization for Economic Cooperation and Development (OECD) are growing — and the majority are accelerating. This bodes well for domestic and international stock markets.
With such a supportive backdrop, what should investors be wary of in the coming year? The potential downside of synchronized economic growth could be that inflation finally rears its head. So far, there has been little evidence of rising consumer prices or pressure on wages, which has given the Federal Reserve a long runway to slowly raise interest rates while staying generally accommodative. If core inflation were to rise meaningfully in 2018, it could prompt the Fed to raise rates more aggressively, potentially slowing the economy and derailing the stock market. But Consumer Price Index (CPI) hasn’t yet reached the Fed’s 2 percent target, so prices remain under control for now.
Investors also should watch for signs the risk sentiment of the markets may be shifting. In 2017, stock markets largely did not react to ongoing drama in Washington or to the flare-up of tensions with North Korea. While we seem to be starting 2018 with the same investor exuberance we saw last year, it is unlikely another 12 months will pass without a single market pullback, regardless of the health of the economic backdrop. Circumstances could converge for a rockier period in the markets in the latter half of the year. By then, investors will have digested the initial impacts of tax reform and will turn their attention to midterm elections and to 2019, when economic growth is expected to be more muted.
Despite these potential headwinds, 2018 is shaping up to be another good year for the markets. While we are likely in the later years of the bull market run, West Michigan investors should still be ready to seize opportunities that fit their financial goals.
Laina Mills is the senior vice president and chief investment officer at Legacy Trust, a Grand Rapids-based wealth management firm. She can be reached at firstname.lastname@example.org.