As the world prepares to put 2017 to bed, investors are looking to 2018 as a year of shrinking opportunities and growing risks.
As 2017 comes to a close, the financial news continues to be cause for investor optimism, but Roger Aliaga-Diaz, Vanguard’s chief economist for the Americas, believes that the extended period of strong market returns and low volatility may have investors feeling too complacent and that a correction is possible within the next 12 to 24 months.
“It’s like the market’s conviction and the current environment of growth and inflation has become part of the status quo and the consensus,” said Aliaga-Diaz. “We feel like this complacent optimism could struggle from a knockdown in some of the growth and inflation indicators.”
Investors should not be confused by the tremendous performance of equity markets, said Stephen Wood, chief market strategist at Russell Investments. Russell expects U.S. GDP growth of 2.25 percent in 2018 as the bull market momentum should carry over into the first part of the year.
Brad McMillan, chief investment officer at Commonwealth Financial Network, says that slowing job growth, declining personal savings rates and peaking consumer confidence create the conditions for an economic slowdown in 2018.
“We’re probably going to have a good first quarter, and likely a good second quarter as well, but at some point growth should pull back and roll over,” said McMillan. “We’re running out of juice to grow the economy and we’re running out of workers. Between job growth topping out and people running out of the ability to borrow more to keep spending, we’re not going to see the kind of growth in 2018 that we’ve seen thus far in this bull market.”
Interest Rates
Vanguard believes Federal Reserve is likely to hike to at least 2 percent by the end of 2018, and expectations for future rate increases will grow throughout the year, bringing the era of accommodative monetary policy to a close in the U.S.
“A little inflation wouldn’t be bad, but if we see those numbers increase significantly, it would embolden the Fed and other central banks to press forward with their rate hiking plans,” said Aliaga-Diaz. “That’s something the bond market is not prepared for.”
Vanguard believes that the labor market will continue to tighten in 2018 as unemployment falls below 4 percent.