4th QUARTER REVIEW - OUTLOOK
It was a solid ending to what was a remarkable year for risk assets. Equity prices finished near record or multi-year highs while the abnormally low volatility continued into year end. In fact, the S&P 500 Index turned in its calmest 12-month period on record. While market sentiment remained elevated, concerns over high valuations, complacency and the potential for an ugly ending to this bull market remained. Nevertheless, the economic backdrop continued to improve, and we saw data suggesting to us that the momentum can continue into 2018.
Some of the key developments included:Synchronized global growth continues with business activity showing signs of acceleration
- A pickup in economic growth
- Business and consumer confidence at or near 17-plus year highs
- Abnormally long stretch of low volatility across asset classes
- Tax reform getting done in Washington D.C.
- Valuations across asset classes remain elevated
Looking ahead, we believe the economic backdrop will continue to support risk assets well into the coming year, but the risks may begin to rise as the year progresses and the market remains vulnerable to a near-term pullback in our view. At a minimum, we would expect volatility across asset classes to pick up in 2018. This past year was an abnormally calm year for U.S. equity markets and we saw strong performance across most risk assets amid a strengthening global economic backdrop and relatively loose monetary policy. The trend towards policy normalization is likely to act as a headwind in 2018, but the strong U.S. and global economies coupled with faster earnings growth could help equity markets maintain their upward bias. While returns in 2018 may not be as strong as they were this past year, the recently passed tax reform could serve as a key near-term stimulus on both fronts. It also could result in a more aggressive Fed. A key risk in our view is a faster pace of interest rate increases from the Fed than currently expected. Another key risk is higher inflation than currently expected, as well as the potential for earnings to disappointment. Elevated valuations, particularly in the U.S., leaves little room for error in our view. Nevertheless, the prospect for higher interest rates makes bonds less appealing to us and as a result, we continued to hold an overweight in equities in our dynamic positioning. Valuations outside of the U.S are more appealing to us, so we maintained our tilt towards international stocks at year end as well.
To read more about our outlook, please click this link.
Brett Lapierre, CFA, Investment Analyst
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