Can US stocks in 2018 repeat the huge gains of 2017?

NEW YORK – After a banner year for US stocks, that saw the Dow hitting repeated records, Wall Street strategists predicted 2018 would see more moderate gains and increased volatility as markets retreated in the final session of 2017 on Friday.

A late sell-off pushed the market into the red amid declines in Apple, Amazon and some other high-flyers, but the decline didn’t put much of a dent in a year of records and soaring valuations.

Analysts expect many of the positive conditions that boosted equities in 2017 to persist in 2018, including robust earnings growth thanks in part to US tax cut signed into law by President Donald Trump and solid conditions in many overseas economies. However, on the downside, they see little chance of a repeat of the extraordinarily low volatility seen in 2017, which led to exceptionally few pullbacks in US stocks.

“2018 should be a good year, but not a great year and it might require a little intestinal fortitude,” said Sam Stovall, chief investment strategist at CFRA Research. “We will get more volatility for less return.” And Matthew Miskin, market strategist at John Hancock Investments, said, “We see more modest returns in 2018 because it’s already priced in.”

“Investors will want to prepare for greater volatility.” The Dow Jones Industrial Average jumped 25 percent in the year, ending Friday’s sesson at 24,719.22 after scoring 71 new records, the most since the index’ creation in 1896. The S&P 500 rose 19.4 percent to close 2017 at 2,673.61, while the tech-rich Nasdaq Composite Index surged 28.2 percent to 6,903.39, after briefly crossing 7,000 for the first time earlier in December.

Other leading bourses also enjoyed rich gains, including in Europe and especially Asia, where Hong Kong jumped more than a third and Tokyo pushed nearly 20 percent higher, propelled by strengthening economic conditions in Asia and positive momentum from US markets.

Wall Street’s performance marks the latest sign of gathering strength in the world’s biggest economy after the 2008 financial crisis pushed the country into the “Great Recession.” US unemployment hit a 17-year low in November and other key data points on retail sales and gross domestic product have also improved.

The “bull market” — defined as the period in which stocks have avoided a 20 percent drop — has now lasted 106 months. That’s the second longest in history, said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

The bull market “now appears to be a vintage wine, with the question being should we pop-the-cork or will income tax recork the bottle for a new life?” Silverblatt said in a note earlier this month.

Trump’s tax cut has indeed lifted optimism about corporate earnings, prompting many analysts to boost their forecasts for business profits and US growth. Wells Fargo Advisors this week predicted the tax bill could extend the US economic growth cycle “by a couple of years more,” propelling some sectors, such as industrials.

Concerns include a possible hastening of Federal Reserve interest rate increases if inflation, which has been modest, accelerates amid higher growth in the wake of the tax cuts.

“Inflation is kind of the one lingering doubt out there,” said Shawn Cruz, senior specialist in trading at TD Ameritrade, who expects comment from new Fed chief Jerome Powell and other new additions to the policy-setting Federal Open Market Committee to be scrutinized closely by markets.

Other worries cited by analysts include a worsening of economic conditions in China and North Korean nuclear aggression.

Concerns about a trade war have moderated somewhat compared with Trump’s initial emergence and harsh talk of “America first” policy. But analysts said negotiations to recraft the North American Free Trade Agreement and ongoing frictions between Beijing and Washington must be monitored. The gains of the last year mean many investors will adjust their portfolios.  Cruz expects most investors to stay in stocks, but to reallocate some funds from market leaders like technology to underperforming sectors, such as energy.

US oil prices closed the year above $60 a barrel for the first time in two and a half years, the latest increase that could attract more cash to petroleum-linked stocks.


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