2018 Outlook: The Ride Isn’t Over, But We’re Getting Closer

2018 Outlook: The Ride Isn’t Over, But We’re Getting Closer

By Krishna Memani 2017-12-12 00:00:00

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Are we there yet?

It’s the question many parents hear from their children on long family road trips.

Inevitably the answer is “no.” The children typically follow up with “Are we getting closer?” to which the reply is invariably, “yes.” Investors are asking very similar questions about the business cycle. Are we there yet? We believe the current macro regime, like all others, will end when:

1. Valuations are at preposterous levels.

2. The Federal Reserve is aggressively tightening policy

3. The U.S. economy is rolling over.

We are not there yet. Are we getting closer? Yes. The unemployment rate is low, wages have trended higher, credit spreads are historically tight, and policy rates in 2018 are poised to move higher. Still, 2018 is poised to be a good year for risk assets, in our view.

The major economies of the world are expanding in unison. Policymakers can still truncate this cycle with further monetary policy tightening, but modest inflation globally remains the saving grace. Emerging market growth in 2018 is likely to be stronger and more widespread than in the developed world. China could be a phenomenal long-term story as the country transitions from “growth at any cost” to higher-quality growth. Importantly, growth in the emerging markets is likely to be less dependent on China as current recoveries in regions such as Latin America gather momentum. In the U.S., growth will be modest as the Fed continues to tighten policy.

Expect market volatility to pick up if/when the Fed decides to press too hard. In a slower growth environment investors are likely to continue to favor true growth companies. Market leadership could shift to the more value-oriented, cyclical segments of the market if fiscal stimulus is successful. Alas, fiscal stimulus at this stage of the cycle is unlikely to lead to sustained higher growth. Europe and Japan, in a year or two’s time, may be dealing with the same issues as in the U.S. (tightening policy, aging credit cycle), but for now are the beneficiaries of positive credit growth and rising earnings.

We are not there yet. In 2018 the cycle will continue but the risks are rising. Equities, globally, continue to be the asset class of choice.

Three Scenarios With Distinct Probabilities

The broad equity market has surged to new highs over the past eight years but with the inevitable fits and starts and divergent market leadership at different points in the cycle. There are three primary scenarios for 2018 with distinct probabilities:

1. A more hawkish Fed could repeat the mistakes of early 2016 and risk curtailing the cycle. (Low probability)

2. Corporate tax cuts could sustain U.S. growth at a higher level, supporting the more cyclical segments of the U.S. market. (Low probability)

3. We believe the highest probability is a continuation of the market leadership of 2017. Economic growth is likely to be deepest and broadest in the emerging markets, a trend that also favors .

For the U.S., the prospect of fiscal stimulus looms but a sustained shift to higher trend growth is unlikely with the economy already close to full employment. Our base case outlook calls for continued moderate U.S. growth, a trend that would continue to favor growth strategies in the U.S.

You can view the complete 2018 Outlook by clicking the link under Related Content at the bottom of the page.

Mutual funds and exchange traded funds are subject to market risk and volatility. Shares may gain or lose value. Equities are subject to market risk and volatility; they may gain or lose value.

Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes, regulatory and geopolitical risks. Emerging and developing market investments may be especially volatile. The mention of specific countries or sectors does not constitute a recommendation by any particular fund or by OppenheimerFunds, Inc.

Carefully consider fund investment objectives, risks, charges and expenses. Visit oppenheimerfunds.com or call your advisor for a prospectus with this and other fund information. Read it carefully before investing.

These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.

OppenheimerFunds is not affiliated with Financial Advisor IQ, a Financial Times company.

© 2017 OppenheimerFunds Distributor, Inc.

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