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Stock Market Outlook: The Word on the Street for 2018

Professional investors predict the current bull market will continue through 2018 but will likely be marked by more volatility and less-stellar returns than in 2017.
Investing, Investing Data, Investing Strategy, Investments
stock market outlook december

Imagine if you could hop in Doc Brown’s DeLorean, set the date to Dec. 31, 2016, and go back in time to tell everyone just how fantastic the stock market would be in 2017. Think many people would’ve believed you? Probably not.

And yet, the Dow Jones Industrial Average skyrocketed through five tantalizing, if largely meaningless, milestones in 2017, climbing from below 20,000 to above 24,000. It surpassed 25,000 in the first few days of 2018. Meanwhile, the Standard & Poor’s 500 Index surged more than 19%, for its sixth-best year of performance in 20 years.

But back to the future. A new year provides an opportunity for investors to reset their expectations and strategies — and do a bit of prognosticating. So what’s in store for 2018? Generally speaking, folks on Wall Street predict a continuation of the second-longest bull market in U.S. history, but a stock market that’s likely to see more volatility and less-stellar returns than in 2017.

Here’s what professional investors will be watching for the rest of January.

Taxes, earnings and rates

With the holidays over, it’s time for investors to get back to work — and January will bring plenty to keep them busy. (Ready to dive in yourself? Learn how to invest money.)

On the heels of the new tax law, which brings the most sweeping overhaul of the U.S. tax code in three decades, investors have lingering questions about how the legislation will affect specific companies, corporate America and the economy as a whole. They’ll get some insight come mid-January, when publicly traded companies start reporting results for the fourth quarter in the multiweek period known as earnings season.

» Read more: What the tax plan means for investors

“For an investor like me, I’ll be listening for what companies will say about where their tax rate will go,” says Ann Miletti, a managing director and lead portfolio manager at Wells Capital Management. Specifically, she’s looking for information about the following: How much of the tax savings companies will keep, how much money they’ll reinvest into capital spending projects, and the extent to which companies will repatriate money — including profits held abroad or spending on operations — amid a more favorable corporate tax backdrop.

January has the potential to start off pretty strong.

Ann Miletti, managing director and lead portfolio manager at Wells Capital Management

Broadly speaking, the tax plan will likely boost corporate earnings (which, in turn, will support higher stock prices ahead) and economic growth, Miletti says. In an already healthy economy, that calls into question whether the Federal Reserve will need to raise interest rates more quickly to stave off inflation, she says. The central bank’s Federal Open Market Committee next convenes on Jan. 30-31, though investors don’t expect policymakers will raise rates at that meeting.

“It’s harder to read the longer-term picture for the full year,” Miletti says. “But I think January has the potential to start off pretty strong.”

Takeaway: Stay invested in the stock market. There aren’t a lot of other places to get comparable returns right now, and stocks are likely to continue to be a fantastic long-term investment.

The return of volatility

OK, so the stock market’s not likely to make a crash landing, but that doesn’t mean you should expect more of the same. Instead, you may want to consider a more tactical approach with your portfolio, both in the short-term and for the year ahead.

Remember way back in 2016 when stock prices regularly made sharp swings (both up and down) on a daily basis? This market phenomenon, known as volatility, was all but absent the past year.

Watch for volatility to make a return in the first and second quarters, says Paul Townsen, managing director at Crossmark Global Investments. “That’s not necessarily a bad thing; volatility is healthy. There’s not a catalyst out there right now that looks to derail the market in any capacity.”

Looking for a short-term, tactical strategy to capitalize on possible volatility? Covered calls, Townsen recommends. In this strategy, investors must first own the underlying stock and then sell a call on that stock. Learn more about this and other simple options trading strategies.

There’s not a catalyst out there right now that looks to derail the market in any capacity.

Paul Townsen, managing director at Crossmark Global Investments

Longer-term, the start of a new year may be a time for investors to rethink some stocks they’ve shunned recently (like energy companies) in favor of the high flyers (think big-name tech stocks), Townsen says. Because the U.S. economy already is on solid footing and the tax plan will provide a further boost to the market, some of the market’s laggards could become the leaders ahead, he adds.

Takeaway: Spend some time reviewing your current investment strategy. It may be time to make some tweaks (including, but not limited to, how well-diversified your portfolio is or whether it’s in need of rebalancing). Need inspiration? Consider these 2018 investing resolutions.

The rest of 2018

While the events of any one month can be interesting — and potentially significant for the market — if you’re invested in the market for the long haul, you shouldn’t stress about short-term disruptions or try to time swings in the market.

Buying into the market when stock prices already are high can be intimidating. But that shouldn’t deter you from participating in what’s proven to be a fantastic long-term investment.

As to where 2018 will end up, it’s anyone’s guess on Wall Street. Strategists are forecasting the S&P 500 will end the year anywhere between 2,650 and 3,000, according to figures collected by Fortune Magazine. That’s a pretty broad range; suggesting the market will see returns somewhere between a decline of about 1% and a gain of 12%, though the median estimate calls for another year of gains.

Buying into the market when stock prices already are high can be intimidating. But that shouldn’t deter you from participating in what’s proven to be a fantastic long-term investment. The market undoubtedly will go up and down in the course of your investing timeline, but one way to minimize the risk of a big shock to your portfolio is to ensure you’ve spread your money across a variety of assets.

Finally, if you can maintain your investing discipline, short-term dips in the market can actually be advantageous for long-term investors. Dollar-cost averaging, which involves regularly adding money to your investments to help smooth out your purchase price, ensures you won’t dump all your money in when stock prices are at a peak. (Intrigued? Learn more about how dollar-cost averaging works and when to use it.)

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