Liz Ann Sonders is the Chief Investment Strategist for Charles Schwab & Co., Inc. because she has a remarkable talent for simplifying securities market data and all the noise that confuses many analysts. Many have asked what we expect for the market performance in 2018 considering the extraordinary gains make in 2017. So now with the help of her presentation we have an educated response. Our major takeaways are the risk of a recession, a correction or Bear Market, and volatility.
Recession: A recession is when the economy (as defined by GDP – Gross Domestic Product) declines for at least six months. Since 1967 there have been only seven recessions lasting from as few as eight months to as many as 18 months; so, the last fifty years have had a cumulative 83 months of recession. Mrs. Sonders points out that a recession is not in the future for 2018 because of the following:
- GDP is well below the index level for igniting an inflation.
- Historically recessions occur after the final interest rate hike and the Fed is still slowly raising interest rates after years of Quantitive Easing.
- Job growth is strong and small business reports increasing number of job openings.
- Wages are under pressure to increase adding financial support to workers.
Correction or Bear Market: Bear Markets are defined as a correction of at least 20% in market indexes. Liz Ann is quick to mention that Bull Markets do not die of old age, instead they are murdered. The catalysts for killing the Bull are typically the increase in interest rates which stymie growth, inflation with devalues future dollars and decreasing employment which reduces earnings and thus retail sales.
While the Fed is increasing interest rates the final tick in the rate is in the future, inflation is still a low two percent, and employment is rising; thus, she does not see a correction of 20% in 2018.
Volatility: The good news – 2017 had only eight days in which the market either improved or corrected at least one percent – that is a record for the last sixty years. The bad news – historically the year following low-volatility years is significantly more volatile. So, Ms. Sonders believes 2018 will be more volatile than 2017.
Why the markets should continue to appreciate: Schwab’s expectations for 2018 are positive for the above-mentioned conditions plus the following:
- Corporate income tax rates are the lowest since 1939.
- 23% of corporate respondents indicate they will use the savings for capital expenditures.
- 10% of the respondents will increase employee compensation.
- In 2017 the Federal government issued fewer new regulations than in the last 20 years.
- Corporate earnings continue to rise.
Ms. Sonders believes the Bull Market still has room to run as her roller coaster chart shows there are at least two more stages of growth – from the current level of enthusiasm, through exhilaration to euphoria before it ends. To dive deeper into the details of her 48-page report go to fmiardmore.com.
Please feel free to question, Kayla, Mike or me if you want further clarification.