Major macro factors affecting the economy and financial markets over the next six to twelve months include interest rates, earnings growth, monetary policy, and global economic growth. Economic data for January and February suggest a soft start to the year, but growth is widely expected to remain strong in 2018-19, supported by expansionary fiscal policy.
By some measures, 2017 was the least volatile year for stocks in the history of the market. Investors became accustomed to the calm and quiet fluctuations of the market. Until the February correction this was more of a trading event and not the kind of activity that has generally caused more significant declines in market history. Future odds are now favoring further bouts of ‘episodic volatility,’ though these should be viewed as opportunities within an ongoing secular bull market rather than a reason for significant concern.
Equity markets are inherently more risky than bond markets, meaning they are more likely to experience large price swings at any given time, whereas high-quality bonds typically see more muted price movements. While there are many factors that can impact equity markets in the short term (i.e., wages, inflation, interest rates, and trade policies), earnings are the most important influence over the long term.
Along with economic activity, earnings growth remains a strong pillar of support for the current market. While there are many factors that can impact equity markets in the short term, earnings are the most important influence over the long term. The strongest earnings growth is expected to come from Energy, Financials, Materials, Industrials, and Technology.
The Bond Market
The bond market has not experienced volatility to the extent that the stock market has in recent months. Instead, it appears to be suspended in a tug of war between competing forces, balancing healthy economic data and uncertainty of the future fiscal landscape. Relative to other central banks, the Fed has been much more direct in communicating and executing its strategy of raising short-term rates. While these hikes only impact short-term interest rates, rising short-term rates influence overall rate sentiment. Interest rates are not likely to be pulled dramatically in either direction.
Return of Market Volatility?
U.S. equity markets soared to record highs at the end of January only to reverse course into a decline over the next time period. Looking ahead, the market may have more confidence in both economic growth and inflation expectations, and global equity markets appear poised for another above-average year in market returns. Fixed income remains a foundational element of a diversified portfolio and should continue to serve as a ballast amidst turbulent equity markets.
Economic data reports for January and February were mixed, but generally lackluster. That’s not unusual following a strong quarter and weather may have been a factor. The economic outlook remains strong in the near term, reflecting an expected impact from fiscal stimulus (tax cuts, increased government spending). With the economy at full employment, above-trend growth should further reduce the unemployment rate and push inflation towards the Fed’s 2% goal. Barring a substantial pickup in productivity growth, binding labor market constraints will eventually force GDP growth back to a sustainable trend (2% or less). Trade policy adds risk and uncertainty to the outlook.
Raymond James. “Economic Snapshot.” Investment Strategy Quarterly. Pg. 4, Web. Dr. Scott Brown
Raymond James, “Investment Strategy Quarterly Recap.” Investment Strategy Quarterly. Pg. 8, Web. Peter Greenberger, Joey Madere
Investing involves risk, and investors may incur a profit or a loss. Past performance is not an indication of future results. There is no assurance that any forecast mentioned will occur. Expressions of opinion are as of this date, subject to change without notice and are not guaranteed to occur. Some material in this newsletter prepared by Raymond James for use its financial advisors. This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. All opinions are those of the author and not necessarily Raymond James.