The markets are starting 2018 with the same momentum from last year. Investors have embraced the global economic reemergence and the stock market lift. There are several factors that are pushing this rally, which bare monitoring:
How will the Trump tax cuts be used by Corporate America? – The tax cut bill was probably the worst kept secret on the planet. Everyone knew it was coming, but one thing we did not know was the final form. The next question is, “will the bill stimulate growth in our economy”? The early results are in and the answer is a resounding YES. Walmart recently announced they are raising their minimum wage by $2, which puts more dollars in their employee’s pockets. Apple, which has 94 percent of its total cash of $269 billion outside the United States, said it would make a one-time tax payment of $38 billion on the repatriated cash. Apple said it would put some of the money it brought back toward 20,000 new jobs, a new domestic campus and other spending.
Will Europe continue to improve? – Our recent numbers also say YES. Germany just came out with the best GDP numbers they have seen in six years. The UK, in the face of Brexit, just announced the best manufacturing numbers in over 11 years. Momentum is certainly cycling through Europe and it looks to be contagious.
Will rates stay low? – This one is a bit tougher to call. We are experiencing strong growth around the world and this growth will eventually lead to higher inflation. At some point, the FED may have to be more aggressive in raising rates. But, the longer they stay down, the better for economic growth.
This economic growth cycle has legs, but that doesn’t necessarily mean the stock market is not overvalued in the short-tem. We do not want to go into our shell too quickly. But, a normal correction in this time frame would be healthy and one we expect to get started in the next couple months.
The markets are finishing the year on a high note with a return to new highs as the cherry on top for our 2017 markets. There seems to be legitimate reasons for such an amazing run during 2017, primarily driven by the global economies. Moving into 2018, we think there are several themes worth following:
Will the global economies continue to expand? – We actually believe they will. This year appears to be the year the global economies bottomed and started to expand again. Our belief is that the expansion could have several years to run.
How fast will interest rates rise? – One of the main “brush fires” that could turn into a blaze is interest rates. If the economies grow too fast, Central Banks will be forced to raise rates more aggressively, which would put a damper on the economies and markets. We expect the FED to raise rates three times next year. Anything more could put a cap on our markets.
Will we experience post-election volatility? – The first year of the election cycle tends to be very positive, ala 2017. However, the second year tends to experience more volatility with lower gains for the year. We will see if this holds true for next year.
With low interest rates around the world, this economic growth cycle has legs. Eventually, higher rates will slow our growth. But, that is a scenario that may take several years to unfold. So, we don’t want to go to defensive too quickly.
As we reflect on this holiday season, we wish you and yours a very Merry Christmas, good health and prosperity in the New Year.