Question: What areas of the economy will you be focusing on this year?
Answer: We always study leading economic indicators for trends, but this year there will be extra emphasis on the factors supporting this broad based secular bull market. I’ll be studying anything that influences national and worldwide economic data, consumer behavior, and trends. Predicting markets in the nearterm is a fool’s game. My focus remains on longer-term trends, growth, economic policy and new initiatives.Markets go up when there are more buyers than sellers. According to Raymond James Research*, secular bull markets have, on average, lasted about 14 years and enjoyed annualized returns of around 16%. We’re now up about 285% cumulatively since the March 2009 low, but this pales in comparison to the 1,400% gain from 1982- 2000*. Don’t forget that during a growth cycle, stocks will likely drop.
Historically, these are often buying opportunities, rather than times to be spooked out of the market. While today’s news outlets emphasize politics, we’ll concentrate on real economic data and consumer behavior. Here are four areas to watch: Economic Growth
U.S and global economic growth has been moderate in recent years. Two reasons are demographic constraints on labor force growth (a fancy way of saying there aren’t enough skilled workers for available positions), and uninspiring productivity rates. While labor constraints typically depend on policy and education, productivity can be enhanced by capital expenditures (capex). Capex is now supported with incentives, thanks to tax reform. Expenditures that improve productivity contribute to economic growth and tend to have minimal inflationary impact. Demographic labor constraints however, are still there. How productivity and demographics evolve may shape growth prospects. Central Banks
Quantitative tapering and tightening (QT or “cutie”) is the technique central banks are using to unwind balance sheets, which is the opposite of quantitative easing. How QT is handled will influence economic growth and markets. Current Federal Reserve
Governor Jerome “Jay” Powell is set to sworn in as Fed chair on February 3, and President Trump is expected to fill several vacancies on the Fed’s Board of Governors. The change in leadership is expected to be smooth. QT has been mapped out, and officials will hopefully stick to that plan.
The outlook for short-term interest rates gets murkier after the middle of 2018. A tightening labor market and strong economy typically provide inflationary pressures. How officials respond to this when it occurs will matter. Outside of the U.S., global investors expect central banks to tighten policy at some point. This ought to have some impact on the dollar and on long-term interest rates both here and abroad. But that’s not today. International Investing; It’s All About Faith
The question for international investors in 2018 is, “How much faith do you have in countries and companies outside the U.S.?” Valuations are generally lower overseas and in many cases, corporate earnings are growing more quickly than in the U.S. The wildcard is how messy will Brexit be when the U.K. decouples from the European Union. Chinese debt levels are also a concern while reform initiatives in Asia and Europe seemingly have support and credibility. How central banks respond will dictate what happens in 2019 and beyond. With Europe looking inward and the Middle East/Russia more focused on keeping oil prices firm, North Korea becomes the remaining significant geopolitical issue for 2018. Overall the global economic outlook for 2018 is brighter, building on progress made in 2017. Belt Road Initiative (BRI)
China is expanding trade routes and economically linking itself to Eurasia by building infrastructure to facilitate efficient trade routes. Marco Polo’s Great Silk Road Economic Belt journey from 1271- 1295 provides a blueprint for the BRI. The “Belt” refers to roads, high speed-railways, pipelines and telecommunications, while the “Road” addresses shipping routes and ports for the maritime movement of products. Due to the key geopolitical relationship between the U.S. and China, the next column will focus on BRI. Trader or Investor
Technological advancements bring complexity to trading patterns and often influence market volatility. With the near instantaneous transmission of information, investors are faced with more choices and information than ever before. Fortunately, financial planning practices exist to navigate this intricate investing environment, enabling investors to more easily work toward their long-term financial objectives. Ultimately, stock prices and markets depend on earnings, growth rates and consumer behavior. The four areas mentioned; economic growth, central banks, international investing, the Belt Road Initiative and consumer sentiment all contribute to market activity. It’s useful to review your portfolio regularly to match your expectations, risk appetite and needs with the headlines and conversations of the coming year. Stay focused and plan accordingly.
*Source: Raymond James, “The Secular Bull Market.”
All investments are subject to risk. The opinions expressed are those of the writer, but not necessarily those of Raymond James and Associates, and subject to change at any time. There is no assurance that any investment strategy will be successful. Asset allocation does not guarantee a profit nor protect against loss. The process of rebalancing may result in tax consequences. Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility.
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This article provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc., Member New York Stock Exchange/SIPC, 606 Bald Eagle Drive, Suite 401, Marco Island, FL 34145. She may be reached at 239-389-1041, email firstname.lastname@example.org. Website: www.raymondjames.com/Darcie.