The “Sweet 16” is set. In the spirit of March Madness and an exciting NCAA college basketball tournament that has brought some historic upsets, epic comebacks, and exciting buzzer beaters, we have compiled our “Sweet 16” for the stock market. Specifically, we have identified 16 keys for stocks for the remainder of the year and assessed their potential implications for the market. Collectively, we expect these drivers to push stocks higher over the balance of 2018, though we acknowledge that volatility could stay with us. We will take a deeper dive into some of these market drivers in our “Final Four” next week.
Our “Sweet 16” For The Markets
U.S. economic growth. We see U.S. gross domestic product (GDP) growth accelerating from 2.3% in 2017 to 2.75–3.0% in 2018, including a 0.25–0.50% boost from the new tax law. Though consumer spending has ticked down a bit to start 2018, we expect tax cuts, job gains, further wage growth, and positive wealth effects to support solid consumer spending growth throughout the remainder of the year. Business spending should get a boost from 100% capital expensing under the new tax law and repatriation of overseas cash. Implication=Positive
Federal Reserve (Fed) policy. We continue to expect three Fed rate hikes in 2018 (including one at the March 20–21 policy meeting), but recent inflation data and comments from Fed officials suggest the odds of a fourth rate hike have increased. As long as the Fed continues its gradual pace of rate hikes, we believe the stock market can go higher over the balance of the year; however, the risk is that the Fed gets behind the curve and spooks markets with hawkish commentary. Implication=Mixed
Interest rates. Stocks have historically done well when interest rates have risen, as we expect will happen this year, particularly when the rise in rates is gradual and accompanied by stronger economic growth. Moreover, we believe interest rates at current levels are supportive of elevated stock valuations, while bonds still provide a less attractive alternative to stocks. That said, any sharp, swift moves higher would be expected to drive higher volatility. Implication=Mixed
Inflation. The pickup in inflation this year has been a source of concern for markets. We see sufficient inflation to support three rate hikes in 2018, but not enough to cause the Fed to accelerate its timetable beyond that. Our forecast for consumer inflation is 2%, though the Fed’s preferred measure (core Personal Consumption Expenditures Price Index) may end up slightly lower. We expect the impact of wage growth on corporate profit margins to be manageable. Implication=Mixed
Global economic growth. We expect global GDP growth to accelerate from 3.5% in 2017 to 3.7% in 2018, with potential upside from the impact of the new U.S. tax law. We expect the U.S. and emerging market economies to drive most of the improvement, even as global central banks begin to remove stimulus, and growth in Europe and China likely slows. Structural reforms provide possible upside globally, while a U.S.-China trade war is a key risk. Implication=Positive
Global central bank policy. The European Central Bank has slowed bond purchases and is expected to end its quantitative easing program this fall. However, with the start of rate hikes unlikely until early 2019, policy remains accommodative. The Bank of Japan has signaled that tighter policy is coming at some point, but it may not start reducing stimulus until well into 2019. Though the risk of a negative surprise is there as global policy begins to tighten, we expect the impact on global markets to be manageable. Implication=Mixed