If you can learn this one thing regarding INVESTING, it’s not difficult to become a successful investor. Can you spot a trend? Are you able to understand the mood of the country, the world, the people in the market? There’s nothing new in that statement, in fact, it was first given legs by the late Sir John Templeton, when he spoke of pessimism being one of the factors that ignite a bull market, then stimulates the market with skepticism, reaches fruition on optimism, and finally ends life on euphoria. When you can learn to spot these marketplace emotions, you’ll be well on the way to building an impressive portfolio.
The current question then is this, where is the market today, as this is written. Is the bull market over or will it continue to run? That’s a question that no one can answer perfectly, but there are indicators that can help you make an informed decision. One thing is certain, we are closer to the end than the beginning, meaning the risks are greater, but opportunities are still there for the taking.
Not taking into account the 14% downturn in 2016, the market has been trending upward nicely and, while world events can vastly change things, we’re projecting an 8 % increase in 2018.
NOTE: This includes roughly 2% in dividends.
Based on the above and realizing this is only an educated prediction, we’re estimating the S&P 500 in the neighborhood of 2730 and the Dow around 24,800. Of note are the possibilities of tax reforms which could generate unexpected rallies and investors jump in to benefit from the reforms
One of the important things to do is to take an informed look at where your portfolio is now, and how far you’ve progressed over the long uptrend. Because of that trend, it’s possible your portfolio is weighted in areas you’re no longer comfortable with based on your age or other factors. And while Bonds traditionally trend opposite from stocks, don’t forget the Treasury and the fact they can bolster your portfolio. Overall, bonds will face resistance in 2018; it is perhaps that very reason that will cause some investors to look at them as a means to invest conservatively and diversify their holdings.
IMPORTANT NOTE: Generally speaking, investors who look at global opportunities should fair better than those who only invest domestically.
Of course, no one, save those with clairvoyance, can accurately and consistently predict the market, but there are trends to watch for. The US market had trended upward slowly and steadily and while this may or may not continue, it has allowed investors to reap modestly but consistent returns over time. Expecting around 2.8% growth in 2018 overall, with of course selected companies that will do better, this is a time to study the market carefully, adjust where necessary and continue to ride the gentle but sustainable wave of growth.
NOTE: While our estimates are somewhat less, the International Monetary Fund is speaking of 3.7% growth in 2018.
One very positive indicator is what are businesses doing in this economy? We’re happy to report that, overall, business is beginning to focus more on revenues and less on cost cutting on share buybacks. Essentially, business is looking to expand, spending dollars on R&D, buildings, and equipment, which is always a positive indicator. Add in increased mergers and acquisitions and this points to sustained growth and a healthy economy overall.
The Wild Card – Tax Reform
The Trump administration receives a lot of press about both the positives and negatives of tax reform, but it is definitely in the mix, and there is a high probability of it passing in some form. Should it come to pass as is, that would reduce taxes on corporations from 35% to 20% which means there would be more cash available for business growth in multiple areas including, but not limited to, expansions, buybacks and profit sharing.
Additionally, the proposed tax reform would tax corporations 12% on cash held overseas. And while this represents a one-time tax, it would further stimulate big business allowing, even more, buybacks, dividends, and profit sharing.
Of course, one thing we must keep an eye on is inflation and wages. Ironically, what’s good for wage earners isn’t necessarily good for the market, as it signals increased spending which limits expansion. It’s a balancing act where multiple factors must be considered to ensure a positive outcome for all parties involved. While wages have been relatively flat, inflation has also been slow, and indicators point to only a 2% inflation in 2018 up only slightly from the 1.7% in 2017. The key is for wages to rise enough for the average man and woman to cope with rising costs, while not causing corporations to unduly tap into their reserves, which could inadvertently cause a downturn.
Another factor to consider is complacency vs. volatility. Since volatility essentially disappeared from the market in 2017, it caused many investors to act, or at least consider, an “all in” mentality believing the only direction was up. The smart investor, even though experiencing fewer returns, turned to bonds as a conservative way to continue growth, while diversifying and protecting their assets.
NOTE: It should be noted that money has continued to pour into fixed income and stocks funds as compared to bond funds.
Where to Invest in 2018
Realize that we are not suggesting any particular sector or stock that is for you to decide. We are concentrating more on the 30,000-foot overview of the market and economy. In our opinion, now is the time to focus on quality companies and stocks that offer a real chance for growth, while having the market capitalization to weather any storms that may inadvertently arise. I’ll be looking at companies that meet the above criteria, while also being innovative and not necessarily conforming to the norms. This is time to “think outside the box,” while also considering the box may contain your nest egg, so treat it carefully and with respect.