In the early weeks of 2018, the value factor is inexpensive to access, said Thomas, but there’s not much on the horizon to suggest that the performance of value stocks will rebound sharply. Yet Thomas said that small-cap value stocks are due for better performance in the near term. While small-cap value stocks have been the best-performing corner of the traditional style box for decades, they have been the worst-performing stocks over the past five years.
Thomas also warned that the S&P 500 was due for a correction at some point this calendar year, though U.S. stock indexes might still end up in positive territory -- but the other presenters disagreed.
“A structural wave of runaway inflation could derail the markets, but we’re not seeing that,” said Léger. “This week we saw deceleration in the U.S. in import prices and producer prices, that underscores this concept that inflation trends will remain subdued.”
A sudden change in monetary policy outlook could also shock financial markets, said Légere, or tighter monetary conditions.
Léger also felt that a global recession could be caused by some sort of major disruption to the U.S. or Chinese economies, but emphasized that there was no sign of one. “This market has virtually dragged investors kicking and screaming to a new high, and equity inflows have lagged fixed-income inflows,” said Léger. “We’re not seeing signs of euphoria yet; fundamentals remain at their best levels since the financial crisis.”
Though monetary tightening by the U.S. reserve is causing the yield curve to flatten, where the interest rates on short-term debt begin to approach the rates on long-term debt, and the yield curve may actually invert later in 2018, interest rates do not necessarily signal an impending recession. This time might really be different, said Molumphy.
“If you look historically, yield curves tend to invert right before recessions, that’s the theory,” said Molumphy. “What’s different about this environment is the unprecedented purchasing of longer-term bonds globally, which will continue to result in the long-term rates being lower than they should be based on pure fundamentals. That’s not going to go away any time soon over the next 12-to-18-to-24 months. The shape of the yield curve may be different than it has been historically.”