The fourth quarter of 2017 capped off a stellar year for global equity markets that came as somewhat of a surprise given the prevailing worries following the 2016 election. In the United States, economic growth improved, interest rates and inflation remained low, and corporate earnings recovered significantly. These factors propelled the S&P 500 to a 21.8%1 gain and to what some may consider a “perfect year”, as, for the first time ever, the benchmark ended with positive returns in all 12 months. Ta-da! In addition to the strong returns, the U.S. stock market’s volatility was at its lowest level in the last decade and set the record for the longest stretch without a day declining by at least 3%. Not only did the U.S. markets thrive, international and emerging market equities soared by 26.6%1 and 37.4%1 for the year, respectively, due to the global economic expansion.
With 2018 starting up in the midst of a 9-year bull market, many investors have been contemplating the likelihood of continued global economic expansion and whether the equity markets can repeat their exceptional performance from 2017. Overall, the consensus appears to be optimistic that the bull market still has room to run. This opinion is primarily due to the persistence of strong global macro-economic factors and expectations that corporate earnings will improve at a healthy rate with the United States’ recently implemented tax law.
Despite the market optimism, there are several factors to be cautious of as the year progresses, including the specter of inflation. A tightening labor market and expanding global economy could lead to upward pressure on interest rates, and as a result, there could be downward pressure on stocks. Interest rate moves can also negatively affect fixed income investments. Furthermore, equity valuations in the United States being above historical averages, trade tensions between the U.S. and China, and the midterm elections are all worth monitoring.
Ultimately, we anticipate that equity markets will continue to make advances in 2018, albeit with more volatility than of late. International valuations appear to be relatively attractive, making it important to have a well-diversified and flexible portfolio. Going forward, it is important to remember that economic expansions don’t typically die of old age, but that the current one will most likely ebb at some point before flowing once again. The key is to have a plan in place today that will enable you to get through any adversity with patience and confidence.