A new year is underway, and across the globe, people are participating in the tradition of making predictions and setting resolutions. We preach all year that investing is not about predicting the future, but rather preparing for it with a well-constructed portfolio of high-quality securities. However, once a year we dust off our crystal ball and allow ourselves the guilty pleasure of making predictions for the year ahead.
2018 Market Drivers
Coming off one of the most unpredictable years in memory, we take a look a the year ahead and identify what we see as the likely primary market drivers.
Economic Fundamentals Strong
- Corporate profitability has been rising, and indicators, such as the Manufacturing PMI, point to continued economic strength in 2018.
Tax Reform Put Into Practice
- It is well understood that corporate earnings will be higher this year due to the lower corporate tax rate.
- In addition, we expect to see, 1) increased repatriation of overseas cash, driving a rise in M&A and share buybacks, and 2) a boost in capital spending, particularly in Industrials as they take advantage of accelerated expensing under the new tax law.
Political Uncertainty Rises
- In 2017, stocks largely ignored the Washington drama, preferring to focus on potential corporate-friendly wins like tax reform and deregulation instead.
- The mid-term elections have the potential to change that. A strong Democrat rebound could put a damper on the GOP agenda. However, gridlock has historically not been viewed negatively by equities.
An Active Federal Reserve
- The Fed continues to be an important factor as they try to refill their economic toolkit, moderate growth, and deal with a flattening yield curve.
- It will be a test for the new chairman, Powell, who takes over the reins in February.
With our crystal ball in hand, we take to predicting the year ahead. While there are a number of factors clouding our view, we are cautiously optimistic about 2018. Our predictions:
- Another 15% upside from the S&P 500 is in the cards this year.
- The big question is how much of the market drivers above are reflected in stocks? With Bloomberg consensus estimates calling for a near 24% increase in earnings for 2018, we see few potential headwinds for stocks until the mid-term elections.
- While Growth stocks had their year in 2017, we expect fundamentals to drive returns for stocks in 2018, favoring Value.
- Cash repatriation should benefit profitable multi-national companies more so than those with little-to-no current earnings.
- We see Small Cap stocks grabbing the lead from Large Cap in 2018.
- Smaller companies tend to be domestic focused and should see a greater benefit from a lower tax rate, increased M&A activity and a stronger economy.
- After an extremely strong 2017, we should hesitate to predict that Emerging Markets will have another year of besting Developed Markets, but it is hard to argue with expected growth.
- The Organization for Economic Co-Operation and Development (OECD) projects real GDP growth of over 6.5% for emerging economies such a China and India in 2018, compared to 3.7% globally.
Interest in Interest
- With the U.S. already on a tightening path, we expect a less accommodative stance on interest rates from the rest of the world.
- The Fed will raise short rates at least three times in 2018, but we will need the rest of the world to join us or some non-traditional maneuver by the Fed to steepen the yield curve.
Strategic Equity Income
CVS Health (CVS) was our top pick last year. Unfortunately, political pressure to lower prescription costs, the threat of Amazon (AMZN), links to distributing opioids, and a threat of a stronger Walgreens (WBA) post the Rite Aid (RAD) acquisition weighed on the stock. With last year’s headwinds gone, we look for the following catalysts in 2018:
- Lower taxes and a market rotation to Value stocks.
- The Aetna (AET) acquisition giving CVS an edge over both Walgreens (WBA) and Amazon (Amazon).
- Continued prescription acceleration due to an aging population.
The online travel agency Expedia Inc. (EXPE), aided by a rise in the global tourism, had a great start to 2017. Unfortunately, the horrific terrorist acts around the world along with a bad hurricane season hurt travel in the second half. The high profile exit of CEO Dara Khosrowshahi to take over Uber Technologies Inc. did not help. We believe travel will thrive again in 2018 thanks to:
- Rapid membership growth of the HomeAway, Trivago, Orbitz, Travelocity, hotwire.com, Hotels.com and Expedia.com brands.
- A focus on fast-growing HomeAway franchise which specializes in vacation rentals.
- A robust economy and millennial choosing experiences over tangible goods.
The investment team is always trying to make improvements. In that light, we have set the following 2018 resolutions:
- Fewer words and more pictures
- More videos and podcasts
- Less crypto-currency and more blockchain
- Fewer Star Wars references (not going to happen)
- More time in our West Palm Beach office (it is below zero in Utica today!)
Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets over $1.6 billion.Overview
Strategic Financial Services, Inc. is a SEC-registered investment advisor. The term “registered” does not imply a certain level of skill or training. “Registered” means the company has filed the necessary documentation to maintain registration as an investment advisor with the Securities and Exchange Commission.
The information contained on this site is for informational purposes and should not be considered investment advice or a recommendation of any particular security, strategy or investment product. Every client situation is different. Strategic manages customized portfolios that seek to properly reflect the particular risk and return objectives of each individual client. The discussion of any investments is for illustrative purposes only and there is no assurance that the adviser will make any investments with the same or similar characteristics as any investments presented. The investments identified and described do not represent all of the investments purchased or sold for client accounts. Any representative investments discussed were selected based on a number of factors including recent company news or earnings release. The reader should not assume that an investment identified was or will be profitable. All investments contain risk and may lose value. There is no assurance that any investments identified will remain in client accounts at the time you receive this document.
Some of the material presented is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. Strategic Financial Services believes that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.
No content on this website is intended to provide tax or legal advice. You are advised to seek advice on these matters from separately retained professionals.
All index returns, unless otherwise noted, are presented as price returns and have been obtained from Bloomberg. Indices are unmanaged and cannot be purchased directly by investors.