2018 Comes Into Focus

The year is winding down, which means that we’re knee-deep in newly minted 2018 investment outlooks. All the usual caveats apply, of course, but there’s a generous helping of perspective too. As an example, here’s a select sampling from recent publications that caught our eye:

“We think valuations look very stretched. That doesn’t mean they can’t go higher than where they are today, but our view lends more to downside risk than upside potential. At some point the market is going to care about geopolitical issues or dysfunction in Washington. It has a way of suddenly sneaking up on us and issues that were ignored start to come up.”
Justin Tugman, comanager of Janus Henderson Small Cap Value,
“What 5 Top Fund Managers Expect in 2018”, Morningstar.com

“The secular forces of globalization, demographics, and technological disruption have for years served as the foundation of Vanguard’s long-term global economic outlook for modest secular growth, tepid inflation, and yet full employment in most major developed economies. Markets and policymakers have been slow to recognize these trends, as most continued to expect a slow yet full recovery to pre-2008 norms. For the past few years, economists and investors started each year holding high hopes for a cyclical bounce, just to correct their forecasts downward a few months later, bringing them back in line with the stubbornly low trends (see Figure I-1 below).
Financial markets have finally come to grips with this reality, and they anticipate little deviation from this long-term outlook in 2018. Simply put, status quo is the consensus baseline for the major economies, justifying the trinity of low global real interest rates, elevated stock valuations, and easy financial conditions.”
Vanguard, “2018 Economic and market outlook: Rising risks to the status quo”

“In 2018, we expect the global economy to reach its historic trend growth level of 3.7% for the first time since 2011. While this is still only an incremental improvement, we believe that, coupled with modest inflation, it provides an environment that can continue to lift markets higher.”
Christopher Probyn and Simona Mocuta, State Street, “2018 Global Market Outlook”

“With the global economic expansion likely to continue, we prefer equities over credit and credit over rates. EM, outside of China, is a bright spot and we continue to prefer EM over developed market assets.”
Goldman Sachs, “Weathering Heights: How to Invest in 2018”

“As long-term investors, our biggest concern is the stock market’s valuation. The P/E ratio of the S&P 500 Index is now above 25 times based on 12-month reported earnings, versus its historical average of 15.7 times. The chart below shows the S&P 500’s valuation based on real 10-year average earnings, with the current multiple more than 30, compared to an historical average of 16.8 (source: Ned Davis Research).”
Ty Nutt, Macquarie Group, “The Way Forward 2018 Global Investment Outlook”

“Overall, we expect volatility to remain relatively muted in 2018, particularly as central banks continue to err on the side of caution with respect to financial stability. Nevertheless, changing policies and any associated liquidity shortfall – real or feared – could trigger spikes in volatility. This presents risks as well as the chance to enter or add to positions. A highly valued, late-cycle market like the US could be cause for concern. ECB tapering and any further BoE rate hikes could create buying opportunities out of market volatility in the EU and UK.”
Allianz, “2018 Outlook : Guard against real-world inflation”

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