2018 Investment Outlook

2017 was an excellent year for investors. The major stock market indexes all repeatedly hit record highs and showed little volatility (dramatic ups and downs).

But what does that mean for 2018? To answer that question, the JRB took a look at what the investment professionals are saying. We focused on insights provided by Fidelity, Goldman Sachs, T. Rowe Price and Vanguard, all of which provide investment options to you through the JRB. We have excerpted their analyses below with links to the full reports for those who want more detail.

The JRB does not provide investment advice. We present these summaries purely for informational purposes. This information is intended to be educational and is not tailored to the investment needs of any specific investor.

Want to know what this means for your investment strategy? Please set up a consultation with the JRB at 888-JRB-FREE (572-3733) or staff@jrbcj.org.


Goldman Sachs

T. Rowe Price



Excerpted from “Markets 2018: 4 Key Drivers” by Jurrien Timmer, Director of Global Macro, Fidelity Management & Research Company

In trying to envision 2018 through my "3 pillars" lens (earnings, valuation, liquidity), I just don't see a continuation of the 2017 scenario, in which rising earnings growth and easing liquidity conditions push valuations higher—a situation where prices increase more than earnings, which are also rising. A more likely scenario for 2018 seems to be one in which earnings continue to climb but at a more moderate pace, while the removal of the liquidity tailwind creates a scenario in which stock prices rise equal to or more slowly than earnings.

I also sense that 2018 will produce a more balanced 2-way dynamic between equity market returns and volatility, as 2017 did for bonds. In other words, stocks may still be positive, but likely have less positive returns and more volatility in 2018. Over the long-term, the S&P 500 has produced an average annual return of 11% against a volatility of 15 [based on the Sharpe ratio, a measure that examines the performance of an investment by adjusting for its risk – Ed.]. Since February 2016, however, it has been an annualized return of 20% against a volatility of 6. This is not normal and not something that investors should ever count on.

On the whole, I believe the stock market in 2018 may end up somewhere between the strong mid-cycle returns of 2017 and the possibility of a more turbulent dynamic in 2019. All in all, that would not be a bad outcome after the run the market's been on.

Goldman Sachs

Excerpted from “As Good As It Gets: Goldman Sachs Economics Research

For the first time since 2010, the world economy is outperforming most predictions, and we expect this strength to continue. Our global GDP forecast for 2018 is 4.0%, up from 3.7% in 2017 and meaningfully above consensus. The strength in global growth is broad-based across most advanced and emerging economies.

On the supply side, we have also seen tentative signs of a rebound in productivity growth from its dismal post-crisis trend. Nevertheless, spare capacity is diminishing rapidly—and already exhausted in a number of advanced economies, including the U.S. There, the question is no longer whether output will overshoot potential, but by how much. By contrast, Southern Europe needs several more years’ strong growth to return to full employment.

If the output gap has largely closed, why is core inflation still so low? Our analysis suggests that a good part of the answer lies in a sizable and relatively long-lasting drag from the earlier weakness in import and commodity prices, which has offset the relatively small (though statistically highly significant) impact of diminishing slack so far. Over the next year, these pass-through effects are likely to diminish and we expect a gradual increase in global core inflation, albeit to levels that are still below central bank targets in most places.

If inflation does move up, the strength in activity will soon feel like “too much of a good thing” for some central banks, which need to slow growth to a trend rate to prevent a bigger overheating—and bigger recession risks down the road. So our Fed call is considerably more hawkish than market pricing, and we are also above the market in smaller G10 economies such as Sweden and Australia. By contrast, our ECB [European Central Bank – Ed.] and BoJ [Bank of Japan – Ed.] call remains modestly dovish to the market.

For now, faster Fed tightening is unlikely to weigh significantly on DM [Developed Market – Ed.] growth, where divergent monetary policies typically have limited net financial spillovers. And while the impact on emerging economies could be more significant, we think that recent structural adjustments have left EM [Emerging Market – Ed.] economies more resilient than in past Fed tightening cycles.

The bigger near-term risks to the outlook are likely political, ranging from the future of NAFTA through the Italian election to the risk of military conflict on the Korean peninsula.

T. Rowe Price

Excerpted from “2018 Global Market Outlook: Right Side of Change

Global Economy -- We expect the global economy to carry much of its recent momentum into 2018, although growth is likely to be slower, overall, than observed in the middle of 2017. Capital expenditures have become the main driver of growth. A more balanced global economy is well positioned for the tapering of monetary accommodation. Tighter labor markets in the U.S. and other advanced economies are likely to lift wage growth and solidify a gradual inflation uplift.

Global Equities -- Innovation and disruptive change continue to benefit a relatively small group of megacap companies. Despite recent gains, valuations for these stocks still appear reasonable. For the first time since the global financial crisis, the world economy is in a synchronized expansion, driving steady earnings growth in most markets. Barring unpredictable political or economic shocks, the global earnings recovery should continue in 2018. However, year-over-year comparisons will grow more challenging. Whether recent low market volatility persists in 2018 remains to be seen, but we do not believe low volatility in itself predicts that a significant correction is imminent.

Global Fixed Income -- Developed market central bank tightening is set to begin in earnest in 2018, ending an almost-decade-long period of monetary stimulus. Monetary tightening will take place against a background of low yields, tight valuations, the possibility of inflation, and a number of ongoing geopolitical risks. However, we believe growth will remain firm in many parts of the world, creating compelling opportunities in select credit sectors. In this environment, it may pay to employ barbell strategies that combine higher yield assets with assets that have lower correlation to equities.


Excerpted from “Vanguard Economic and Market Outlook for 2018: Rising Risks to the Status Quo

Strong market returns and low financial volatility underscore investors’ conviction that the current global environment of modest growth and tepid inflation is here to stay. We agree with this long-term economic prognosis but argue that the chances of a short-term cyclical rebound are underappreciated. So the risks lie in mistaking persistent trends for the 2018 cycle.

The most pronounced risk to the status quo resides in the United States, where an already tight labor market will grow tighter, driving the unemployment rate well below 4%. This, followed by a cyclical uptick in wages and inflation, should justify the Federal Reserve’s raising rates to at least 2% by the end of 2018. Expectations of additional rate hikes would inevitably follow, ending an era of extraordinary monetary support in the United States and possibly leading markets to price in more aggressive normalization plans elsewhere. None of this is status quo.

For 2018 and beyond, our investment outlook is one of higher risks and lower returns. Elevated valuations, low volatility, and secularly low bond yields are unlikely to be allies for robust financial market returns over the next five years. Downside risks are more elevated in the equity market than in the bond market, even with higher-than-expected inflation.

In our view, the solution to this challenge is not shiny new objects or aggressive tactical shifts. Rather, our market outlook underscores the need for investors to remain disciplined and globally diversified, armed with realistic return expectations and low-cost strategies.