Market Outlook 2018

Derek Carawan, AAMS

As we start the year, many have asked how long can the markets around the world continue to climb to new levels. So, I am going to offer some thoughts, insights and cautions for the upcoming year. The stock markets are, of course, very fluid and can change rapidly based on world events, economic factors and consumer/investor euphoria and fear. So, I’ll preface my thoughts by emphasizing that what you are about to read is based on what we know today, and any investment actions should be taken with considerations to your time horizon, risk tolerance, diversification and your financial advisor.

What We Know

The Commerce Dept. recently reported that sales of new homes soared to their highest level in 10 years in October with sales up about 9%. That’s 18.7% higher than the same time last year. The median price of a new home is 3% higher than a year ago at $312,000.

The National Association of Realtors reported that the number of homes under contract but not yet closed surged to 3.5% in October.

The Conference Board reported that consumer confidence rose to a 17 year high in November. Considering that consumer spending is roughly 70% of our economy, that is a very strong positive. Really not very surprising when you look at the housing data mentioned above because home purchases themselves create a lot of consumer transactions such as hiring contractors, plumbers, electricians, buying furniture, landscaping etc.

If a successful tax reform bill can be implemented that should be good for businesses. Lower taxes for businesses could encourage companies to pursue investment ideas which could help boost the demand for labor and economic growth. This in turn, could lead to higher wages and more jobs not to mention improved earnings. This is important for a number of reasons, one of which is if stock prices are moving higher an increase in earnings for these companies is important to keep the markets from overheating and stay within more realistic valuation levels.

Based on current GDP growth, we could see a 3% annual rate, which would be 3 quarters of GDP growth at or above 3%. This hasn’t happened since 2004 according to Brian Wesbury of First Trust.

These developments help create an increase in monetary velocity. Put another way, the rate at which money moves through the economy. That’s a good thing!

Considerations

According to LPL’s research department, small caps could benefit greatly from a lower corporate tax structure. Emerging markets could experience strong growth as well. Small caps generally pay higher tax rates than large caps. So real tax reform could be a significant benefit to this asset class. Small companies do tend to be more volatile, so it is important to consider less volatile large caps as a partner in risk sensitive portfolios.

Fixed income instruments such as investment grade corporate bonds will add some diversification and provide potential higher yield than Treasuries.

LPL’s research group tends to think that we are in the later half of the economic cycle based upon rising interest rates, low unemployment and wage growth. These observations indicate few signs of increased risk of recession within the next year.

If the U.S. dollar remains strong and interest rates continue to rise we would expect precious metals, particularly gold to not fair too well.

Calculate Your Risk Tolerance

If you would like to take less than 5 minutes to get an idea of your risk tolerance you can go to my website at www.carawanfp.com and click on “Free portfolio analysis” on the right of the screen. Answer the prompts and you will be prompted to make a selection on three or four screens showing potential returns/losses that you are comfortable with. The calculator will finally generate a risk number for you from 0 to 99 (conservative to aggressive). I propose this just in case you are interested. We will NOT contact you regarding your participation in the calculator. If you have questions, please contact us at 919-870-8181 to discuss. We welcome the opportunity to speak with you. The wording used in the exercise is for our clients, but anyone is welcomed to use it. The projections or other information generated regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Results of this tool may vary with each use and over time.

Caution

There is a seemingly new idea called Bitcoin that we are hearing a lot about lately. As of today, it is up over 20 times from this same day a year ago and has seen WILD swings (it is down over $1500 as I write this article) and is quite possibly due for a major correction. Harvard finance and banking professor, Robin Greenwood, along with economics professor Andei Shleifer coauthored a study that found that when we see a price run-up of 100% or more in a two-year period, that assets probability of crashing is 50%. If the run-up is 150% or more during the same period, the probability increases to 150%!

Derek Carawan is a LPL Financial Advisor and LPL Registered Principal / Securities offered through LPL Financial/ Member FINRA/SIPC and may be reached at, www.carawanfp.com , 919-870-8181 or derek.carawan@lpl.com .

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax or legal planning advice. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

No strategy assures success or protects against loss. Investing is subject to risk which may involve loss of principal.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

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