We think 2018 will add another year to this longer-than-average bull market, but we believe we are moving to the third period of this cycle. As in hockey, the third period means there is still sufficient time left on the clock. But as the game extends, conditions change and it's a period when 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. We expect more frequent leadership rotation among investment categories, which we believe can help reward proactive portfolio rebalancing and broader diversification.
||Signs of Fatigue
|Improving U.S. economy – Low unemployment, better wage growth and improving business investment could spur GDP growth to its fastest pace since 2014. While we think legislative execution will fall short of original expectations, President Trump's pro-growth agenda has the potential to extend the current economic expansion.
||Consumer debt and housing – Elevated household debt threatens future loan growth, which, combined with muted domestic wages, could drive slower personal spending. Additionally, we expect softer housing market conditions in response to higher regulation and rates. With housing and consumers accounting for two-thirds of GDP, this poses a challenge for the Canadian economy.
|Rising profits – Sustained economic growth provides support for faster revenue growth. While profit margins are likely to compress, corporate earnings should rise at a mid- to upper-single digit rate, setting the pace for equity market returns.
||Monetary policy changes – With monetary policy providing a cushion of safety for the equity markets in recent years, we anticipate the gradual withdrawal of stimulus this year to likely prompt greater volatility in response to disappointing data or headlines.
|Faster global growth – World GDP is poised to accelerate for the second straight year, helped by increased output in the U.S. and Europe, less drag from slower growth in China and improving global manufacturing and trade activity.
Full valuations – Canadian and U.S. equity markets are trading at above-average valuations, while strong performance has also lifted overseas valuations. Though not in bubble territory, full valuations leave less margin for error and suggest more moderate gains moving forward.
|Rebounding exports – Stronger growth in the U.S. and a favourable (low) loonie set the stage for a helpful lift in domestic exports, which account for more than one fifth of domestic GDP.
||Geopolitical disruptions – Given higher valuations and less help from central banks, we think the market may have sharper reactions to geopolitical shocks, including tensions with North Korea, drama in Washington, disruptions in Brexit negotiations and policy changes in China.|
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, suggesting the final buzzer isn’t about to sound. However, 2018 brings the shift toward tighter monetary policy (albeit very gradually), domestic economic imbalances, heightened political risks and above-average valuations across many asset classes.
Talk with your Edward Jones advisor today about opportunities to position your portfolio for the year ahead, and strategies to keep you on track toward your goals well beyond 2018.
Sources: 1. Morningstar Direct, 9/30/2017. Average annualized return between the S&P/TSX Composite and the S&P 500 Index 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 investing, including currency fluctuations and political, social and economic risks.
This is our perspective on important market and economic topics designed to help you make decisions affecting your long-term financial strategy.Read more
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