We head into 2018 with significant economic tailwinds, improving estimates for corporate profitability, and expectations for additional economic expansion. That said, I suspect the hunt for equity market ROI this year may be a bit more challenging than it was in 2017.
In 2017, a post-election year, the S&P rose by 19%, the Dow Industrials gained 25% and the Nasdaq lurched 28% higher. If history is any indication, the year following equity market gains in excess of 15% normally sees returns modulate. According to IBD, since 1963, in years after equity market gains in excess of 15%, a more modest 7.5% return follows. Much of the run up in prices that we saw in 2017 was predicated on what was expected from the Trump administration. That has been priced into equity markets, and though the tide and equity prices will continue to rise, valuations are currently stretched. I suspect we see a modest shift in rotation out of US equities into less expensive global markets. A degree of that focus will be into the emerging space with a concentration on Asia and Africa. Europe will also be more in vogue than in recent years. Outside of the US, central banks have remained relatively accommodative, in the process, effectively supporting that thesis and inflating asset prices. Additionally, international markets are generally less expensive.
Given that this is the first note of 2018, I have a few predictions:
US GDP: 3.3%
US Unemployment Rate: 3.9% (Full Employment)
US 10-year yield: 3.15%
Federal Reserve Inflation targets (2.0%) achieved
Gold: 1,485/t oz
WTI Crude Oil: $65/bbl
Dow Industrials: 27,932
S&P 500: 2993
Nasdaq: 8007
Risks
Military engagement with North Korea
Hotter than expected inflation in the US
Middle East violence/unrest
Political turmoil in Iran
Impeachment efforts by either the Democrat party and/or the President’s cabinet gaining momentum
Unexpected mid-year political theatrics
Thank you for your continued support of Kenny’s Commentary and best wishes for a prosperous and healthy 2018 – Peter
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