With the stellar 2017 in the books, what are the expectations and risks going forward? Markets in the next few months will be driven by higher earnings and repatriation of overseas corporate money. Higher earnings are expected to come from a growing economy and the lowering of corporate taxes. Despite the renewed interest by the public in the stock market, there is still a large amount of cash sitting on the sidelines. The M2 money supply (cash, CDs, money markets, and checking accounts) has grown in the last ten years from about seven trillion dollars to approximately 14 trillion dollars.
The risks to the market are disappointment in corporate earnings and interest rates that rise faster than expectation (due to inflation rising faster than predicted). These two factors do not include the omnipresent risks due to politics and international incidents. Even given these risks, the current tailwinds are stronger than the headwinds and the market is on course for another positive year. On the other hand, the outlook for bonds is very guarded given the expectation of rising rates (bonds lose value as interest rates go up). Initially, investors may sell some of their bonds and put their money into stocks or cash. But if interest rates exceed expectations, investors will be attracted to the higher yields of bonds again, possibly at the expense of stocks. All these elements will tend to increase market volatility in 2018. However, at this time, the investor mentality is to buy the market dips.
Since trying to time the market is rarely a good strategy, the ongoing best advice is to stay invested according to your risk but maintain cash in short-term investments to cover three years of expenses.
This letter represents the opinion of John D Quimjian as of January 12, 2018
John Quimjian is an investment advisor representative with Physicians Wealth Solutions LLC, a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein.