Winded Markets May Face a More Difficult Climb in 2018

Global stocks benefited from broad economic growth in 2017, and some forecasters expect growth next year to be slightly better. Yet Franklin Equity Group’s Coleen Barbeau thinks equity valuations, particularly in the US market, already reflect that rosy outlook. Here, she explains why investors should be cautious as we enter the new year.

After running hard in 2017, global equity markets may find it more difficult to maintain pace in 2018. Although we think the economic backdrop is likely to remain largely unchanged in the new year, we see a more entrenched global economic recovery giving central banks more leeway to withdraw stimulus.

This past year, the information technology sector and other growing areas of the market have benefited from optimism about the global economic recovery and improving corporate earnings.

We’ve also seen ebbing political and policy fears. The populist impulse that characterized 2016 looks to have receded. In 2017, a number of world leaders from Chancellor Angela Merkel in Germany to Prime Minister Shinzo Abe in Japan won reelection.

As economic conditions have continued to improve in Europe and parts of Asia, we have seen markets outside the United States push into the lead. Emerging markets also began to outperform in 2017, amid sturdy growth in China and India and a turnaround in Brazil.

Why the Favorable Global Backdrop Should Persist in 2018

As we near 2018, we think the global economy can continue to hum along. According to the International Monetary Fund, the pace of global economic growth is likely to remain steady in 2018, with global gross domestic product growing a projected 3.7% in 2018 after expanding 3.6% in 2017.1

Based on projections, we think the United States is likely to see solid growth, low inflation and limited wage growth, while in Europe the economic expansion can become further entrenched. Growth in China may weaken modestly amid a slowdown in the property market and government investment.