Dana R. Consler, BridgeTower Media Newswires
Anticipation for 2018 is high for the investment markets and our economy for numerous reasons: tax reform, interest rates, geopolitical risk and can-the-bull-market-continue-another-year, to name a few. Uncertainty about the future can create investment anxiety, which can lead to poor decisions. Here is our outlook for the new year and some do’s and don’ts for your investment portfolios.
Tax cuts will arrive next year in the form of the new tax bill. Corporate America will be the big winner, leading to an effective lower average tax rate of 17 percent, according to the Bank Credit Analyst organization. Inflation-adjusted, or real, GDP is expected to be boosted in 2018-2019 by about 0.2 percent to 0.3 percent by this legislation. We expect the tax reform legislation to be a positive for our stock market next year.
The outlook for the U. S. and global economy next year looks bright. GDP growth of 2.50 percent to 2.75 percent here and 3.5 percent overseas appears a reasonable expectation. Growth in the euro area and Japan has been solid and strength in emerging markets is very evident. Healthy readings for durable goods orders, unemployment claims and business confidence, both for consumers and businesses, are reasons for optimism.
This solid economic growth should translate to continued higher stock prices, albeit at a lower rate than we’ve enjoyed in 2017. Stock market returns in 2018 of 5 percent to 8 percent seem reasonable, with a key being a continuation of the solid year-over-year growth in corporate earnings. Earnings will grow by double digits in 2017, but should earnings growth falter in 2018 that could be a catalyst for much more stock market volatility than we’ve experienced in the last two years.
We have not seen a stock market correction, defined as a decline of 10 percent to 19 percent. since February 2016. During long term bull markets — like we have enjoyed since early 2009 — corrections tend to occur about annually. So we are overdue for one of these. If one occurs, it would be a buying opportunity, and you need to be prepared for it.
A bear market is defined as a decline of 20 percent or more from the high point stocks reach. We do not see that happening anytime soon. Therefore, it is too early to become overly bearish on stocks. That said, investors should be taking some risk off the table since we are at all-time stock market highs. Pending interest rate increases expected in 2018 by the Fed could slow economic growth and impact bond and stock investments.
What to do now:
• Stay near your target allocation for stocks, less perhaps 5 percent to 10 percent, and add alternative strategies to further reduce market risk. Alternatives help you “play defense” as we get closer to the top of this long-term bull market.
• International equities should comprise 25 percent to 35 percent of your stock position, to benefit from the diversification they provide. Did you know that in 2017 international equities have outperformed U. S. stocks?
• For your bond investments, shorten your portfolio duration to reduce your exposure to rising rates. Look for variable rate securities that will benefit from rising interest rates in 2018 as well as fixed income securities whose prices should hold up well in spite of rising rates. Again, “play defense” by taking risk off the table.
• In both stocks and bonds stay very diversified across different securities, sectors and styles. This is critically important because one strategy, growth-vs-value stocks, for example, never outperforms all the time. Diversification should include alternative strategies with stocks at all-time highs and interest rates on the march upward.
• It is too early to get too bearish on stocks because the twin conditions that tend to predict bear markets, a recession or an inverted bond yield curve, will not likely be present in 2018. So don’t be tempted to bail out of either the stock or bond markets. Stay invested but with less risk than in normal times.
Every new year is different, of course. While the economy looks to be solid and growing, investment risks are lurking. Get your investment portfolios prepared for 2018.
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Dana Consler is executive vice president of Karpus Investment Management, a local fee-based, SEC-registered investment advisor managing over $3 billion of assets for individuals, corporations, retirement plans, IRAs, non\profits, unions and trustees. Offices are located at 183 Sully’s Trail, Pittsford, NY 14534, (585) 586-4680. He has been a regular contributor to The Daily Record for 20 years.
