Market Outlook in 2018: Bull Markets & Trends | Personal Capital
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Market Outlook in 2018: Bull Markets & Trends

We covered some of the key events that happened in 2017. Now let’s take a look into what that means for 2018.

The Bull Market

Currently, we’re enjoying the second-longest bull market of the last 100 years. We’re not sure how long this will last, and that makes some folks understandably nervous. But one important thing to remember is this: bull markets don’t die simply from old age.

Valuations are above historical averages, but this doesn’t mean they’re particularly concerning. Why? Because of tax cuts and interest rates. With tax cuts boosting earnings for most companies (though not yet fully reflected in analyst projections), valuations are not especially frightening.

Also of concern to some is a flattish yield curve, which historically have been precursors for recessions and declining stock prices (i.e. flat or inverted yield curves). Longer-term rates remain stubbornly low. But today, low corporate bond yields are providing cheap financing for most publicly traded companies.

We don’t see signs of economic slowdown or anything that may impact the availability of credit/liquidity, which typically are the enders of bull markets.

Shrinking Supply

Stock prices are a function of supply and demand, and supply is shrinking, with the number of public companies shrinking by more than half in the last 20 years, and total shares outstanding on the S&P 500 falling about 22 billion since 2011, according to Yardeni Research.

So as the money pouring into stock funds are sourced from things like 401k and pension fund contributions, or bonuses getting invested, it is spread among fewer stocks and fewer shares, making those shares more valuable. While it’s impossible to know this trend’s full impact or how long stocks will benefit, a reduced supply could be a powerful bullish force.

Global Outlook

U.S. stocks have dominated their international counterparts in this bull market, which resulted in higher valuations. The forward PE of the MSCI US Index is 19, while the forward-looking PE of the rest of the world is 16, according to MSCI, and on an even playing field, that makes international stocks more attractive looking ahead. As always, we strongly believe a strategic allocation to each, and a disciplined approach to rebalancing, gives the best chance for long-term success.

Sector Bets Are Getting Bigger (Again)

Most bull markets are headlined by a specific sector. This year, Technology is again rallying and gobbling up share of the market in the process, now representing 24% of the S&P 500. If you are an index investor, you should probably take notice, since this may be a bigger bet than what you realize or want especially if you also own individual stock positions in favorites like Apple, Google, Microsoft, Amazon or Netflix. Chinese technology stocks have experienced a rapid rise, so a similar issue exists in many international stock index funds.

We are not bearish on Technology stocks, or growth stocks in general. The recent rally and valuations are nowhere as extreme as we saw in the late 1990s and it is entirely likely to continue for another year or more. But we do think it is increasingly important that investors are aware of their exposures.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Craig Birk leads the Personal Capital Advisors Investment Committee and serves as Chief Investment Officer. His focus is translating improvements in technology into better financial lives. Craig has been widely quoted in the Wall Street Journal, Bloomberg, CNN Money, the Washington Post and elsewhere. Prior to Personal Capital Advisors, he was a leader within the portfolio management team at Fisher Investments, helping assets under management grow from $1.5 billion to over $40 billion. Craig graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.
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This year, my top financial priority is:

Building my emergency fund
Paying off high-interest debt
Budgeting better
Saving for a short-term goal, like a vacation or new car
Increasing my investment contributions
Maintaining status quo - I’ve got this under control

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