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Outlook 2018

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Each year, Janney Investment Strategists provide their respective outlooks on the markets and economy for the upcoming year. Outlook 2018, Shifting Economic and Financial Forces: A Positive But Increasingly Complicated Impulse, highlights the primary factors that could influence investment performance in 2018.


Shifting Economic and Financial Forces:
A Positive But Increasingly Complicated Impulse


Overview

  • Positive economic activity, propelled by healthy consumer and business spending, extends through the year.
  • Fiscal measures, if enacted, could provide a modest boost to growth that is already running above trend.
  • The synchronous global backdrop remains intact, as the breadth of economic participants experiencing positive growth is elevated.
  • Global equities should benefit from the fertile fundamental backdrop, allowing corporate profits to grow at an above-average pace.
  • Interest rates remain low, but are biased to move upward in concert with sturdy economic activity, rising input costs, and tentative hints of inflation.
  • The Federal Reserve’s cycle of monetary tightening will remain in place, adding several more rate hikes throughout the year.
  • Historically narrow spreads in the credit market offer “carry,” but bear monitoring as valuations are stretched.
  • Many municipal bonds offer appealing ratios, but pending tax law changes must be considered when evaluating their tax-equivalent merits.
  • Geopolitical risks are non-trivial, and, yet, none surface as an imminent threat to disrupt the otherwise constructive views concerning matters economic or financial-market related.


Economy & Equity Markets Outlook

By Mark Luschini, CMT, Chief Investment Strategist

Positive global economic activity is widespread. Today, the number of countries reporting expansionary conditions is the highest in more than a decade. Led by a surge in capital spending, the world economy is experiencing its strongest growth since the mid-2000s and leading indicators point higher (Chart 1). The solid international expansion will serve to bump domestic industrial production and capital spending orders, and also support export activity. We expect the ebullient global backdrop to persist for a while. Click here to continue reading.


Fixed Income Market Outlook

Interest Rates

By Guy LeBas, CFA, Chief Fixed Income Strategist

Despite plenty of opportunity for fiscal drama, three Federal Reserve rate hikes (most likely), and a case of missing inflation, 2017 proved a relatively uneventful one for the interest rate markets. Last year’s outlook called for 10-year yields to finish around 2.33%, and as of the time of authorship, lo and behold, the 10-year Treasury is trading at 2.35%. The two most dominant interest rate themes, however, go beyond just the level of long-term interest rates; interest rate volatility compressed sharply, following equity market volatility, and the yield curve flattened considerably. Both are signs that the market is pricing in a coming peak in short-term interest rates with confidence. One of these themes looks set to persist into 2018. Click here to continue reading.

Credit Markets
By Jody K. Lurie, CFA, Director, Corporate Credit Analyst

The “risk on” trade was alive and well through most of 2017, as investors hardly altered their theses in reaction to geopolitical risks and other exogenous factors, given the mostly positive economic data and potential for fiscal policy catalysts coupled with Federal Reserve rate hikes. Much of this optimism was founded on solid trends, including falling default risk, which Moody’s and S&P guided will persist next year. Yield-hunting behavior led to an openness of the credit markets to refinance debt and reduce near-term obligations, resulting in record U.S. corporate bond issuance this year. 2018 primary and secondary market activity will be dependent on the direction of interest rates coupled with investors’ review of the risk/reward trade-off versus alternatives. We expect further FOMO (“fear of missing out”) activity, but an ultimate switch as TINA (“there is no alternative”) disappears over the course of next year. Click here to continue reading.

Municipal Markets
By Alan Schankel, Managing Director, Municipal Strategy

Before recent Congressional tax reform proposals introduced the potential for reduced tax-free bond issuance after December 31, 2017, municipal market volume was on track to hit about $360 billion in 2017. It now looks like total volume in 2017 will surpass $400 billion, as borrowers facing potential loss of the tax exemption push deals originally scheduled for 2018 into the current year. No matter the final result of tax reform, few expect municipal issuance to grow next year. Click here to continue reading.