2018 Outlook & Review
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Hi, I'm Ed Campbell and this is the 2018 Economic and Market Outlook.
The global economy experienced synchronized growth acceleration in 2017.
It has been broad-based with advanced economies all benefitting and most emerging economies gaining momentum.
Prior to 2017, world economic growth had consistently slowed in the post-crisis expansion, but 2017 was the year where economic growth improved and broke the deceleration trend, and growth may shift up again another year in 2018.
2017 was also a stellar year for global stock markets with the S&P 500 up more than 20%.
What was perhaps most remarkable is that these returns were delivered in a year where market volatility reached unusually low levels.
This chart shows the 12-month rolling standard deviation based on daily data was the lowest on record since the 1960s.
Therefore, risk-adjusted returns were even more impressive than total returns.
Indeed, the 12-month rolling return risk ratio, or sharp ratio, based on daily data over the past 30 years was in the 97th percentile and during 2017 reached the highest levels we've seen since the tech boom of the mid to late 1990s.It seems likely that equity returns will be lower, volatility higher, and drawdowns bigger in 2018, but that is not an especially bold statement.
Nevertheless, 2018 is likely to be another rewarding year for equities, in our view.
Earnings growth is likely to be strong again over the next 12 months, even before one factors in the one-time windfall from corporate tax cuts, and while equity markets are trading at above average valuations, multiples don't typically contract during the late cycle expansion.
With the U.S. economic expansion still on firm footing and the global economy in the best shape since the financial crisis, global monetary policy should continue toward normalization.
With the Fed hiking rates and shrinking its balance sheet and the ECB continuing to taper bond purchases, monetary conditions should remain, on balance, very accommodative but less so on the margin.
We expect the Fed to deliver three rate hikes this year consistent with the dots and believe market expectations will have to shift upward to meet the dots.
The recently signed Tax Cut and Jobs Act creates upside risks for growth, inflation, and interest rates in 2018.
Therefore, we think fixed income returns are likely to be slim to non-existent.
Within equities, we would focus on sectors rather than region styles or market cap segments.
Late-cycle optimism should boost cyclical sectors over defensive ones.
We are underweighting defensive sectors that sport high relative valuation such as utilities and consumer staples.
Financials and technology are our favorite sectors. In an environment where it is very difficult to find attractively valued asset classes, financial stocks still fit the bill. Financials should also benefit from a lighter touch on regulation, rising interest rates, improved risk appetite, and robust capital markets. Technology sector fundamentals are superior to all other sectors, and forward PU ratios are only slightly higher than the broad market today despite 2017 strong outperformance.
For more details on our views, please visit our website qmallc.com for our complete 2018 outlook and review.
We want to wish you a happy and prosperous new year, and thank you for watching.