Wall Street is experiencing the second-longest bull market since March of 2009. For the first time since 1935, the Standard & Poor’s 500 stock index logged a 12-consecutive-month positive return in October.
Drawn to the strong returns, investors have feasted on the bull market for the last eight years. And though Wall Street is peaking around the corner to see if a bear market is near, there are no glaring signs that the market will face a downturn in 2018.
Key indicators for market expansion through 2018
Gross Domestic Product (GDP) within healthy range
Arguably the most important indicator of a healthy economy, GDP measures of the country’s output. Declining GDP adversely impacts corporate profits and stock performance; too much GDP is undesirable if it leads to an increase in inflation. According to Investopedia, 2.5-3.5 percent gross domestic product (GDP) growth per year is the optimal range to avoid erosion of stock market gains. Estimates published by the U.S. Department of Commerce’s Bureau of Economic Analysis in November cite real GDP increased 3.1 percent in the third quarter of 2017, well within the optimal range.
Sustained low interest rates
Interest rates remain close to historically low levels. Even though the Federal Reserve recently decided to boost the fed fund rate between 1.25 percent and 1.5 percent at its December meeting, investors are not worried. A hike reflects the Fed’s confidence in the economy, not the opposite. Even if the Fed raises rates a few more times in 2018 as is predicted, rates will still be low.
As of November, according to the Bureau of Labor Statistics, unemployment was at its lowest in 16 years at 4.1 percent, beating the Fed’s initial 6.7 percent target. According to the Fed, monetary policy decisions must “foster the lowest levels of unemployment that is consistent with stable prices.” Given this mandate, its recent decision to raise interest rates further affirms its confidence in the continued growth of the economy..
Improving global economies
The U.S. economy outpaced anticipated growth in the third quarter, growing at its fastest pace in three years according to Reuters. In remarks made to the Joint Economic Committee in November, Fed Chair Janet Yellen called the economic expansion “increasingly broad based across sectors as well as across much of the global economy.” Yellen’s statement is consistent with claims from leading global entities like The Conference Board which has stated that the global economy exceeded expectations in 2017 and is slated to continue its momentum through 2018 with a 3 percent growth rate – largely due to the increase of maturing economies and emerging markets.
The S&P outlook for 2018 is up provided the price/earnings ratio remains constant. According to Bloomberg, investment strategists say the S&P will end 2018 north of 2,900. BMO Chief Strategist Brian Belski expects earnings growth to reach double-digits for 2018.
The Federal Open Market Committee (FOMC) estimates that a 2 percent inflation rate is ideal for the economy. As of mid-November, the U.S. Core Inflation Rate was at 1.8, lower than the long-term average of 3.66 percent from 1957 to 2017.
Increase in business spending
The U.S. economy has sustained 3 percent growth for two quarters for the first time since 2014. The biggest part of the economy – consumer spending – grew by 2.4 percent in the third quarter according to Bloomberg.
Market corrections anticipated but not fatal
The positive forecast for 2018 doesn’t mean the market won’t make a correction. Nor is that a bad thing. In fact, each of the bull markets in the last 40 years has had a correction. Defined as a drop of at least ten percent or more for an index or stock from its 52-week high, market corrections happen frequently as part of a natural cycle of peaks and troughs. According to The Motley Fool, research suggests that the average correction lasted less than approximately 72 trading days and is generally shorter than bull markets.
Impact of tax reform legislation
The market was already in great shape before President Donald Trump signed the Tax Cuts and Jobs Act on December 22, 2017. A complete makeover of the nation’s tax code gives way to substantially reduced tax obligations for both businesses (the corporate tax rate will be cut from 35 percent to 21 percent) and individuals (income tax reductions between 2 and 4 percent will affect most households). More disposable income generally means more spending – which helps the economy expand.
The question is, will this boost the already booming economy? According to a Moody’s Analytics study, not in the long term. If congressional Republicans get their Christmas wish, economists anticipate increasing disposable income and job market gains will boost the market in the short term.
Still, it may be wise to heed Humphrey Neil’s advice: “Don’t confuse brains with a bull market.” Pay attention to signs that may indicate a market crash is near and prepare in advance. Work with a financial planner to:
• Develop a diversified portfolio
• Rebalance your portfolio
• Ride out stock market corrections
Miramontes Capital is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Miramontes Capital and its representatives are properly licensed or exempt from licensure. This blog is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Miramontes Capital unless a client service agreement is in place.