[title card] SunTrust Investment Advisory Group: Outlook 2018
Stretching Out The Cycle
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The global stock market has been rising since 2009, led by the US, which is now in the midst of its third-longest economic expansion and second-longest bull market in history. As we look into 2018, we expect the global economy and equity markets to stretch out what is already an extended cycle.
We are focused on three main themes: First, we see a global economy on cruise control, transitioning from acceleration to stability. Second, we anticipate a bullish but bumpier path forward for equities. Lastly, we expect a modest step up in interest rates and continue to step up our focus on high-quality within fixed income.
The acceleration in global growth seen over the past year is now set to transition to stability. Europe is still relatively early in its recovery, Japan is pushing forward, and emerging markets are reaffirming their position as the world’s principal growth engine. Moreover, central banks remain supportive and continue to stretch out the path toward policy normalization.
Turning to the US, at almost nine years old, the economic expansion is well past the average of roughly five years. However, we are not seeing the overheating and excesses within the economy that tend to precede recessions. Thus, what we are lacking in strength we are gaining in length.
Fiscal stimulus and a pickup in capital investment as result of tax reform should lift US growth toward 3 percent, matching the fastest pace of this recovery.
Yet, geopolitical uncertainty is a key risk that could take the global economy off of cruise control.
The political pendulum is swinging toward populism and nationalism across the globe. Attention will shift to the US midterm elections, as well as important elections in Europe and Latin America. Further, tensions with North Korea remain elevated.
Importantly, a global economy on solid footing should result in a greater ability to absorb unexpected shocks.
Stock valuations are on the expensive side, but profits, aided by a global economy on cruise control, should allow markets to grind higher.
We do, however, anticipate a bumpier path forward as markets have gone a long time without a normal pullback and a fair amount of good news is already priced into stocks.
We maintain a slight US bias—though less so than in past years. In 2018, we anticipate the baton to pass from monetary policy to a pro-growth fiscal policy. This has tended to be a positive environment for stocks.
Within the US, we see relative value in mid caps. Cyclical sectors, such as financials and industrials, should be bolstered by the global economy and fiscal stimulus.
Upside also remains in developed international markets. They are earlier in their expansions, have easier monetary conditions, and more attractive valuations, which is slightly offset by higher political risks. Similarly, the turn in Emerging Markets that began in 2016 appears relatively early, as the two prior outperformance cycles lasted seven and nine years, respectively.
Turning to our final theme, we expect a modest step up in interest rates and continue to step up our focus on high-quality within fixed income. Rates have been somewhat range bound over the past year, but have stayed well above the inflection point following the Brexit shock in 2016.
Looking ahead, the 10-year US Treasury yield should see a modest step up to a range of 2.25 percent to 3 percent with a bias toward the upside. We anticipate that the Fed will hike rates two or three times in 2018.
Supporting our interest rate forecast is a solid global economy, a low US unemployment rate, and less accommodation from the Federal Reserve. There also remains a fair degree of investor complacency on
the potential for rates to move higher.
We expect to see the yield curve flatten slightly but fears that this foreshadows a recession appear overdone. That said, markets will be adjusting to a new Fed chairman and several new board members. This increases the possibility of an error at a time when the Fed is attempting to normalize monetary policy.
Valuations are fairly rich for many higher-risk fixed income asset classes, where the yield advantage to treasury bonds is at its lowest level since before the financial crisis. Therefore, we are primarily focused on high quality fixed income which should support portfolios during risk-off periods. We continue to view investment grade municipal bonds as attractive for investors in high tax brackets.
So given our expectation that the global economy and equity market further stretch out the cycle, we recommend investors tilt toward equities. The bumpier path forward, though, suggests a focus on high quality bonds within fixed income. They should act as a portfolio stabilizer during soft patches. Also, consider some exposure to non-traditional strategies given our expectation for more of a two-way market in 2018.
We thank you for watching and for entrusting SunTrust with your wealth. Please reach out to your SunTrust advisor to learn more about how our investment themes will impact your portfolio. We look forward to keeping you informed on our investment views as the year unfolds.
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