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Nine Bold Market Predictions for 2018

Most think the market will be up next year. But opinions vary on how, why and what threatens it.

This time of year everyone wants to tout their expertise and have something to point back to if their predictions are correct. But, of course, many year-end outlooks get it wrong and are never seen or heard from again.’s Year-End Trends and Outlook issue, which includes dozens of market and industry insights, has some of the best and most interesting, but there are many other opinions out there as well.

So, in addition to our outlook issue, we’ve done some of the leg work for you. No one has the time (or wants to spend it) combing through hundreds of pages of reports for information they already knew or don’t feel they apply to them.

Here are some of the best excerpts from 2018 outlook reports and, when possible, a link to the whole report if you want to dive deeper.

A Recession Is Coming ... in 2020

Citing tighter monetary policy and capacity pressures materializing in 2018, tougher times are likely ahead, according to Morgan Stanley Research. “Apart from potential exogenous shocks—such as geopolitical tensions, financial accidents or political turbulence—we do not see an ending to the current recovery materializing in 2018,” the bank said in its report. “We are not on recession watch now, and peg the 12-month probability of recession at 25 percent. However, by 2020, that probability grows to a near certainty.”

Déjà Vu Downturn in January 2018?

Steve Cucchiaro, the founder and president of 3EDGE Asset Management, and the firm’s Chief Investment Strategist Fritz Folts wonder if January 2018 could be a repeat of January 2016, when there was a largely unexpected equity market downturn. “The Fed raised short-term interest rates in December of 2015 and indicated that they would most likely continue to raise short-term rates throughout 2016,” the two wrote in their outlook. “These seemingly benign policy actions by the Fed caused a very painful [first quarter] in 2016. The Fed has now raised short-term rates this December (December 2017) and signaled more interest rate increases to come in 2018. Could this mean another ugly quarter for equities in [the first quarter of] 2018?”

China Will Export Inflation in 2018

Head of BlackRock China Equities Helen Zhu wrote that China has stopped exporting deflation to the rest of the world while cleaning up the environment, cracking down on property speculation and curbing rapid credit growth. “Capacity cuts have put a floor under commodities prices and boosted the value of Chinese exports. ... Could its next big export be inflation?” Zhu wrote. “Such a sea change would coincide with a pick-up in U.S. inflation. Prices of U.S. imports from China are still falling, but at a slowing rate. And overall import prices in the U.S. and the eurozone are rising on the back of higher commodities prices. Bottom line: We see an inflation bump out of China helping to prop up global inflation, albeit modestly.” 

An Equities Streak Last Seen 90 Years Ago Will Continue

“Stocks are expected to outperform bonds for the seventh consecutive year in 2018, a track record not seen since 1928,” according to Bank of America Merrill Lynch Global Research. In their outlook, the firm’s strategists are “bullish on stocks, bearish on bonds, long U.S. dollar, and long on volatility.”

Demand for U.S. Municipal Bonds Will Keep Growing

“The municipal bond market has long been dominated by U.S. individual investors seeking tax-free income. However, more non-U.S. investors faced with low (or negative) local interest rates are buying taxable munis for yield and also as a way to invest in U.S. infrastructure. We expect this trend to continue in 2018,” wrote Craig Brandon, the co-director of Municipal Investments at Eaton Vance.

If Investors Abandon Balanced Portfolios, a “Melt-Up” Could Occur

“If current macro trends continue, I wouldn’t be surprised if the equity market gained substantially from current levels in the months ahead in an almost parabolic fashion.” wrote Ryan Beach, the CEO of CLS Investments. But he worries investors are too deep in love with the current bull market and might abandon reason. “How many years in a row can we inaccurately warn that ‘winter’ is coming before investors lose confidence in our warnings and abandon our carefully crafted, diversified portfolios?”

Don’t Count Out the Automotive Industry

Giorgio Caputo, a senior fund manager at JO Hambro Capital Management, wrote that fears of disruption in the automotive industry are overstated. “With change slow-moving in the vehicle world, the persistence of incumbents is being underestimated, especially in the luxury space,” Caputo wrote. “Don’t count them out. Change is generally slow-moving, in five or even 10 years’ time we may very well find ourselves with an industry that looks a lot like today.  Patient investors will be rewarded.”

Cannabis and Cryptos to Take Off

“Each is rising independently, but their interrelated nature could push the investment case higher for each,” Matt Osborne, the co-founder and CIO of Altegris, wrote in a report. “Beginning in January 2018, California will join 28 other states allowing adults to buy marijuana for both medicinal and recreational purposes. Observers estimate that North American legal sales of marijuana, for medicinal and recreational use, will grow 27.5 percent annually, to reach more than $24.4 billion in 2021, up from $7.2 billion in 2016.” Osborne also wrote that the marijuana industry’s struggle handling cash has opened up another door of opportunity for digital currencies. Bitcoin and other cryptocurrencies could become more viable payment options partly out of necessity in 2018 if the marijuana industry grows as expected.

The Dollar Is a Question Mark

Wells Fargo said in a report it has a “moderately positive” outlook on emerging market currencies against the U.S. dollar and, domestically, it faces uncertainties in 2018. “Heightened geopolitical risk and U.S. policy uncertainty may produce volatility, and currency pairs may trade in wide ranges over the year. Tax reform to encourage U.S. companies to repatriate foreign earnings is unlikely to help the dollar, in our view, because corporate liquidity is already overwhelmingly held in dollars.”

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