The 2018 Forecast

Welcome to 2018, where the economy looks good and we are now nine years into the current bull market, making this the second longest bull market on record.

This has been fantastic news for money managers across the globe and has made life easy for investors and advisors alike. With everything going up consistently, it is easy to secure double digit annual growth on your equity portfolios, even when you are using the most expensive investment vehicles such as mutual funds.

But how long can it last?

This bull market has been running since 2009, after the world was shaken by the global financial crisis.  It has been largely fuelled by ultra-low interest rates and aggressive quantitative easing by governments, which resulted in huge investor appetite for equities.

2017 was an extra special year with markets showing strong growth after the election of President Donald Trump and the US markets witnessed the lowest levels of volatility since 1965.

So what can go wrong? There are many potential risks lurking, savings levels have fallen rapidly and spending is rising year after year, sparking new fears of inflation which central banks must tackle by increasing interest rates.

Central banks are now starting to reduce their programmes of fiscal stimulus, the best example of which is the Federal Reserve starting to sell its bond holdings. This will force the economy to stand on its true fundamentals rather than government assisted growth and we will discover the true health of the economy.

By technical valuations, current stock prices are heavily overvalued and US markets have rarely looked so expensive. Expected tax changes and reduced regulations in the USA have already been priced in, despite the fact that these have not yet been delivered by the government. The Chinese economy is set to encounter some challenges, with a growing debt problem and the need to transition to a slower, more stable economic model.

Recent research from Vanguard Group, a fund giant with over $5Trillion in assets has stated that they believe there is a 70% chance of a US stock market correction, citing stretched equity market valuations and narrowing of the bond yield curve as the primary causes of concern.

Altogether, it seems like a case of when markets will drop, rather than if they will drop, and with the current high stock prices and increased level of risk, physical assets with solid yields will continue to be the favourite option for all but the most adventurous of investors.