2017 was a good year for the buy-and-hold investor where broad-based gains were captured across all major US & global equity markets. In addition, volatility hit historically low levels, which was a far step away from the past several years where investors have been bombarded with above-average volatility.
As we enter 2018, practically all major US and global economic indicators are positive and no signs of recession exist in the near future. The good news is that the US & global economies are expanding, the bad news is that all this positive news is already priced into the markets.
Therefore, 2018 will likely experience higher volatility than 2017 with one or two corrections possibly up to 15%. However, I do believe we will likely end the year higher in the US markets and especially emerging markets.
We also seem to be at the crossroads in long-term treasuries and interest rates. 2018 could very well be the pivotal point where interest rates finally break to the upside, reversing the trend of 30+ years of declining interest rates. (see below chart)
Finally, commodities have the potential to break-out to the upside and experience sizable gains in 2018. We saw crude oil, steel and copper rebound in 2017 and, giving higher inflation and increased economic activity, we may be at the beginning of a worthwhile bull market in commodities.
Investment Considerations, Opportunities & Risks
My advice for 2018 would be to maintain a risk-on trade for US & Global equities with extra attention to protecting gains by paying close attention to warning signs of a pullback. It is worth noting that the 10-year US Treasury rate (2.56%) now exceeds the dividend rate on the S&P 500 (1.8%), making equities less attractive as an alternative for income for long-term investors versus the last several years were interest rates on bonds was less than equities.
As interest rates continue to rise, publicly-traded REITs will likely see short-term pullbacks, creating excellent buying opportunities at discounted prices.
Commodities and commodity-related equities should fare well in 2018, especially if a definitive break-out occurs in the next several weeks.
Emerging markets will outperform as US dollar remains soft. The US Dollar will likely experience some upward movements temporarily, which would be an opportune time to re-allocate additional funds in the emerging market space as emerging markets will pullback on dollar strength.
Finally, I would consider dollar-cost-averaging out of positions that have experienced sizable gains and re-allocating that capital to non-correlated, income-producing investments that may provide enhanced diversification, such as non-traded alternative equity and credit investment funds. What’s more, as interest rates rise, bond funds will experience pressure on prices. Utilizing a credit manager that focuses on floating rate and secured loans will allow for attractive income and a hedge against rising rates.
For a full list of the most popular and widely-referenced economic charts for tracking the economy, please visit www.StrategicStockInvestor.com.
Besides the 37-year chart of US 10-Year Treasury Yield, below you will find a chart of the 1YR, 3YR, 5YR, 10YR and 30YR US Treasury Yields. Historically, yield spread tightening has predicted major downturns in equity markets. Today, we have yet to see the yield spreads tighten to the similar levels that foresaw a major downturn. While history can’t predict the future, yield spreads are indicating further growth in equities at the moment.
Altanta’s Fed’s GDPNow tools is showing a 2.8% GDP growth rate for Q4 2017: