2018 Outlook: Moving into the End of the Cycle

Commonwealth Research Team

 

By Brad McMillan, CFA®, CAIA, MAI

Senior Vice President and Chief Investment Officer for Commonwealth Financial Network ©

As 2018 begins, the good economic news continues. Companies are hiring, both consumers and businesses feel confident, and economic growth is good and getting better. Even as conditions remain very positive, there are some trends to watch. Job growth is slowing as we run out of available workers, and confidence is peaking. The Federal Reserve (Fed), spurred on by the good conditions, is likely to continue raising rates, which might act as a headwind. 

What to watch

Changing trends could indicate that growth may peak later in 2018. For the stock market, which is now expecting strong growth in corporate investment and earnings, any slowdown—even as growth continues—could hit confidence.

On the economic front, four factors may affect growth:

  1. Consumer spending: Though it’s held steady for several years, any slowdown in 2018 could place a drag on growth.
  2. Business investment: As the pool of new workers has run out, companies have invested to make existing employees more productive. This trend should continue through 2018, supporting economic growth.
  3. Net exports: With a cheaper U.S. dollar, exports have exceeded imports in recent quarters. As the dollar gets more expensive, the balance could shift back to negative, dragging on growth.
  4. Government spending: This has had no noticeable contribution to economic growth, and it’s not expected to change.

Inflation can also be expected to rise slowly. Current low unemployment says to raise rates, but low inflation says not yet. Which side will win in 2018? The Fed is likely to raise rates again as early as March in anticipation of inflation, rather than waiting until the evidence is unmistakable, which could mark another change during the year.

The bigger picture

When we look at 2018 as a whole, the economy should grow between 1.5 percent and 2 percent, with faster growth in the first half and slower growth in the second. Corporate profits should also grow at healthy rates. Inflation is expected to run around 2 percent for the year, but it may be slower in the first half and pick up in the second half. As the Fed raises rates in response to faster growth and rising inflation, the 10-year U.S. Treasury note should yield around 2.75 percent by year-end.

Solid fundamentals poised to calm turbulence

With both economic and profit growth likely to continue, sound fundamentals should support financial markets. But if confidence pulls back to more normal levels, lower valuations may offset those improvements.

At this point, the biggest apparent risk is political, not economic. With the mid-term elections approaching the potential for shaken confidence—and valuations—is very real. Fortunately, the solid economy should help mitigate any political turmoil. 

Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. The S&P 500 Index tracks the performance of 500 widely held, large-capitalization U.S. stocks. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results.

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Authored by Brad McMillan, senior vice president, chief investment officer, at Commonwealth Financial Network®. 

© 2018 Commonwealth Financial Network®

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