2017 is finishing with a bang. Yes, there was a little sector rotation, and the tech stocks gave back some of their steady gains. But in general, this market continues to steam ahead unaffected by any major correction or even a pullback. With 2017 almost in the books, what events should investors keep a careful eye on looking ahead to the 2018 stock market—that could either continue to fuel the market or lead to that long-awaited correction?
5 Events That Could Shape the
2018 Stock Market
The Tax Cuts:
The Corporate and Individual tax cuts haven’t made their way through the Washington policy meat grinder yet to land on the President’s desk. But we can make some assumptions as to the contents of the deal. The first is a sizeable corporate tax rate cut. Additionally, it will be sweetened with amnesty for profits that have been stored internationally when they are repatriated. This should have a solid immediate impact on the economy, and will enable corporations to either buy back dramatically more stock, or increase their dividends.
Nothing comes without a cost however. As 2018 progresses, keep an eye on the Fed to see if they get cold feet and start to raise short-term interest rates as a response to all of the fiscal stimulus. Also, the dollar could fall as currency investors measure fiscal irresponsibility next to the stronger economy. If either of these two reactions happen, much of the stimulus will be erased.
Speaking of the The Fed, they have now been tightening for over a year. There is always a delay between when tightening starts happening, and when it is fully felt in the economy. So far, the tightening has not slowed down the economy. But for the 2018 stock market, the Fed will be joined by European monetary tightening as well. In a sense, this doubles down on the impacts.
The benign years of decreasing energy costs could be over. OPEC seems like they are finally cutting supply, and international demand is still growing. Rising energy costs create winners and losers. Keep your eye on Transportation, Utilities and Energy Sector… Lesser impacts to the Industrials and Materials and any energy intensive companies.
Earnings have had a solid run this year, and have helped to justify the valuations and run ups in the stock market. The good news is that Wall Street Analysts are actually estimating that Earnings will increase at a faster pace. This has been an earnings driven rally, and the continuation of earnings growth is really good news.
The unemployment rate is at 4.1%. For the economy to continue to grow, and companies continue to profit, either there needs to be one of two phenomenon. Not counted in the unemployment rate calculation is people that have either given up or are not working at full capacity. If some of these people take advantage of the new employment opportunity that is very healthy. If, companies take advantage of the tax cut, and invest in new technology that improves productivity, that is also very healthy. On the other hand, if there is suddenly increased competition for workers, and costs increase, this would negatively impact corporate profits, and increase inflation.
No one has a crystal ball that accurately predicts every last move. However, it is important to understand the upcoming issues and see how they unfold in the 2018 stock market. Staying on top of these macro events will help investors divine the direction of the market, and enable them to quickly react when either the positive or negative impacts happen.