Outlook 2018: Six Key Views

By Craig Fehr December 13, 2017

With the end of 2017 approaching, attention turns to the outlook for 2018. The current economic expansion is now another year older and investment conditions are evolving, raising some uncertainties about the road ahead and what actions investors should take to stay on track with their goals. Let's take a closer look at some key issues and what they mean for our 2018 outlook.

We think 2018 will add another year to this longer-than-average bull market, but we believe we are moving to the proverbial third period of this cycle. 

As in hockey, the third period means sufficient time is still left on the clock. But as the game extends, conditions change and star players can carry the load while fatigue causes mental mistakes and greater swings in the action. 

In our view, persistent economic growth and rising corporate earnings can lead markets to further gains. But fatigue, in the form of rising policy risks and extended valuations, will drive greater volatility, including a higher likelihood of a short-term market correction this year. In addition, we expect more frequent leadership rotation among investment categories, which we believe can help reward active portfolio rebalancing and broader diversification. 

Importantly, we don’t see a recession emerging in 2018, nor do we think equity markets are exhibiting signs of euphoria typically associated with market tops. This combination suggests the final buzzer isn’t about to sound. However, we think 2018 will bring a shift toward tighter monetary policy, domestic economic imbalances, heightened political risks and above-average valuations across many asset classes. 

So, what does all this mean for investors? Here are six of our key views to consider as you take a look at your portfolio and your goals heading into 2018. 

  1. We think this bull market’s largest gains are behind it, and in the latter stages of this expansion we expect more moderate returns from equities, compared to the average annual return of 14.9% since this rally began1
  2. It's important to remember it’s been nearly two years since the last 10% market correction, and there have been only two 10% pullbacks since 2011. We think the balance of headwinds and tailwinds raises the potential for a temporary correction in 2018.
  3. Slower domestic economic growth and range-bound oil prices – bounded by OPEC production adjustments, elevated global inventories and rising U.S. shale production – could restrain TSX earnings-growth relative to foreign markets. Faster growth in the U.S., along with ongoing monetary policy stimulus in Europe and Japan, and relatively lower overseas valuations, present compelling opportunities for international investments.
  4. We think the era of extraordinary central bank stimulus is shifting. After multiple rate hikes in 2017, we think the Bank of Canada will move to the sidelines as domestic growth slows and higher rates begin to influence the housing market. This may level out short-term rates for a bit, but we do expect interest rates to rise modestly over time as this cycle progresses. In the U.S., we believe the Fed will continue withdrawing its stimulus through persistent but gradual rate hikes and initiating its strategy to reduce the size of its balance sheet.
  5. We think the loonie lingers around current levels. The Canadian dollar has been a key area of focus over the past year, and we think its 2017 surge to US$0.83 was overdone. A widening interest rate gap versus the U.S. and the absence of a lift in oil prices will, in our view, keep the loonie in the mid- to upper-70-cent range for a while longer. 

Last, speaking of items of attention, we don't think the North American Free Trade Agreement will be scrapped this year. The breakdown in recent NAFTA negotiations is discouraging, but we don’t expect the trade deal to be abandoned completely. Instead, we anticipate adjustments that will likely involve some concessions from Canada and Mexico. 

With the new year just around the corner, talk with your Edward Jones advisor about strategies that can help keep you on track toward your goals, regardless of what 2018 has in store.

Important Information:

1Morningstar Direct, 9/30/2017. Average annualized return between the S&P/TSX Composite and the S&P 500 since 3/9/2009 Returns expressed in local currency and include reinvested dividends. Past performance is not a guarantee of how the markets will perform in the future.

Equity investments carry risk, including the loss of principal. There are special risks inherent in international and emerging market investing, including currency, withholding taxes and high levels of taxation, political, social and economic risks.

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