Russell, on the other hand, believes that U.S. markets could enjoy a blow-out rally in 2018 as other countries’ economies ignite and grow. Wood expects the 10-year Treasury yield to hit 2.7 percent by the end of 2018.
High valuations will mute returns moving forward, said McMillan.
“Though earnings growth should continue, when you see historically high valuations in the present, you have to believe that they’re going to moderate when confidence does roll over,” said McMillan. “We could be in a year where we see higher earnings, but lower multiples eat into the returns,”
As interest rates continue to increase, markets will test the assumptions of investors who believe higher valuations are justified by accommodative monetary policy.
As a result, Investors might be better off looking outside the U.S., said Wood.
“There are now multiple ways to participate in the global growth story, there’s no single global theme,” said Wood. “There are broad investment themes now available to investors who are willing to be globally diversified.”
Russell believes that emerging markets, Japan and Europe will outperform the U.S. over the course of 2018. Similarly, the yen, euro, British pound and emerging markets currencies should offer better opportunities to investors than the U.S. dollar.
McMillan said that investors might also consider increasing their allocations to cash and mixing alternative strategies into their portfolios.
“I would also be diversified on a strategy basis,” said McMillan. “Historically, almost everyone is long-only, buy-and-hold investing, and there have been quite a few hiccups on alternatives, but there’s little doubt that alternative strategies can add value.”
Since growth, though muted, will continue over the mid-term, Vanguard recommends that investors stay the course for 2018.