Mary Ann Bartels, head of Merrill Lynch Wealth Management Portfolio Strategy
“We’re now in the second-longest bull market for stocks in history—and there’s growing speculation it could be running out of steam. But if the earnings for companies in the S&P 500 expand in 2018, and if interest rates don’t rise too much and stay near their historic lows, we think the equity market can continue to advance.
Corporate earnings have been a lot stronger than the market anticipated, and we believe they can remain strong as we move into 2018. The anticipated tax cuts only increase the likelihood that earnings will rise.
“Technology should help the bull market continue into 2018.”
Another powerful force supporting further gains is technology. Today we’re in a new digital era, and that has launched technology into a leadership position in the stock market. And what we’re seeing now is very different than what happened in 2000, when tech stocks were about to fall. The excitement then was about early hints of what advances in innovation might do. Now, we feel technology’s impact constantly—it’s woven into our daily lives and improving how businesses operate, so technology should help the bull market continue into 2018.
We also expect other cyclical sectors, including industrials and materials, to benefit from the strength of the global economy, along with any large-scale infrastructure spending here in the U.S.”
Joseph Quinlan, head of Market and Thematic Strategy, Bank of America Global Wealth and Investment Management
“Geopolitical events can be disruptive to markets; and some threats, if realized, could generate significant declines in asset prices. What’s important to keep in mind here is that markets historically have tended to bounce back quickly, even from major upheavals.
Looking to the coming year, we have to hope that China, which has a strong interest in maintaining stability, will not allow the situation with North Korea to deteriorate. But even without war, per se, a major cyber attack on the U.S. electric grid, for example, could leave people without access to bank accounts and unable to travel or conduct business.
“It’s important for investors not to overreact to any given event or crisis.”
Rising populism globally could also be a problem. The greatest risk here is advances by fringe political parties that undercut traditional democratic values, such as religious tolerance and belief in the rule of law. The good news is that historically, democratic societies have responded to social discontent before it posed a dire threat to their way of life.
But whatever the future might bring, it’s important for investors not to overreact to any given event or crisis. You don’t want to disrupt your investment strategy because of an event that might only have a short-term impact. And remember that diversification is the cornerstone of risk management and can be used to address geopolitical risk just as it can help manage other types of investment risks.”
Niladri Mukherjee, director of Portfolio Strategy for PBIG and International, Bank of America Global Wealth and Investment Management
“We believe both emerging markets and international developed markets, including Europe and Japan, could provide opportunities for investors in 2018. Economic growth in Europe has been surprisingly strong, fueled by a rise in domestic demand, an increase in bank lending, and easy monetary policy. Monetary policy is also quite loose in Japan—where unemployment is falling, as it is in Europe, and wages are finally beginning to pick up. All of that means a positive outlook for stocks in those regions.
And because equities in Europe and Japan massively underperformed U.S. stocks during the past decade, valuations in both regions are still quite favorable compared with the U.S.
In emerging markets, “valuations remain relatively cheap.”
Emerging-market equities have already had a great couple of years, outperforming U.S. markets. But there too, valuations on the whole remain relatively cheap. And we think emerging market economies will continue to benefit from rising global growth and a strong corporate-profits picture.
Within emerging markets, Indian equities look particularly promising. And we expect the Indian economy to grow faster than other emerging markets—and much faster than developed ones. Analysts at BofA Merrill Lynch Global Research believe that rapid growth should propel India past the United Kingdom, Germany and Japan to become the world’s third-largest economy—after the U.S. and China—by 2028.”1
Matthew Diczok, head of Fixed Income Strategy, Bank of America Global Wealth and Investment Management
“Right now, the U.S. economy is still chugging along and is actually getting stronger. The unemployment rate could soon be the lowest it has been in almost 20 years and inflation is expected to pick up. All of that puts pressure on the Fed to continue raising rates to fulfill its dual mandate: to keep prices stable and maintain the economy at full employment.
Yet the Fed only controls short-term interest rates. Longer-term rates are more market-driven and they generally do not rise as much as short-term rates during periods when the Fed is hiking.
“You’ll finally be able to earn more on bank deposits and should have the opportunity to reinvest in higher-yielding bonds.”
But even if rates rise a full percentage point, the increase on payments for mortgages or other consumer lending should be very manageable. At the same time, you’ll finally be able to earn more on bank deposits and should have the opportunity to reinvest in higher-yielding bonds. For example, you could consider building a laddered portfolio of bonds that mature in sequence over the coming years. As the older bonds come due, you can reinvest the proceeds in new bonds with higher interest rates.
On balance, higher rates aren’t something to fear but rather to look forward to, especially if increases come at the measured pace we expect.”
Chris Hyzy, chief investment officer, Bank of America Global Wealth and Investment Management
“In terms of how to allocate assets, we continue to expect equities to outperform fixed income amid ongoing U.S. and global expansions, improving corporate profits, and inflation that remains subdued. Although we remain positive about U.S. equities, we also emphasize international stocks, including emerging markets, given their more attractive valuations and better earnings prospects.
Within equities, we suggest a strong, solid mix between growth and value stocks, and a particular emphasis on dividend growth stocks—that is, equities whose dividends are likely to grow rather than just those that have the highest current yields. Dividend growth is our number-one theme for long-term investors.
“The best thing for anyone to do in 2018 is maintain discipline as an investor.”
For fixed income, we prefer high-quality, investment-grade corporate bonds over Treasuries—although a small allocation to Treasuries, which offer liquidity and relative safety, is still advisable.
The best thing for anyone to do in 2018 is maintain discipline as an investor. It’s important not to overreact to volatility caused by concerns over geopolitical risk, China’s growth story, or anything that may come out of the headlines about Washington policy. Stay the course, diversify, rebalance during market volatility, and take a goals-based approach that’s focused less on market performance and more on achieving your personal objectives.”
For more insights, read “2018 Year Ahead: The Next Great Odyssey.”
3 Questions to Ask Your Advisor
- Should I rebalance my portfolio given the strong performance of stocks this past year?
- Are there steps I can take now to prepare for a potential rise in interest rates?
- How could I take advantage of international opportunities, such as those in Europe and emerging markets?
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1 BofA Merrill Lynch Global Research “Global Economic Weekly,” November 17, 2017, page 11.
This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. The investments discussed have varying degrees of risk. Some of the risks involved with equities include the possibility that the value of the stocks may fluctuate in response to events specific to the companies or markets, as well as economic, political or social events in the U.S. or abroad. All sector and asset allocation recommendations must be considered by each individual investor to determine if the sector is suitable for their own portfolio based upon their own goals, time horizon, and risk tolerances.
Investing in fixed income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop, and vice versa.
Investments focused in a certain industry may pose additional risks due to lack of diversification, industry volatility, economic turmoil, susceptibility to economic, political or regulatory risks, and other sector concentration risks.
Investments in foreign securities involve special risks, including foreign currency risk and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are magnified for investments made in emerging markets. Investments in a certain industry or sector may pose additional risk due to lack of diversification and sector concentration.