Six investment themes for 2018
For investors, 2017 is turning out to be a bountiful year, with stock prices soaring over 20 percent in the U.S. and many other markets. This surge in stock returns has been supported by an economy that appears to be gathering strength. It is difficult to find a dark cloud amongst the generally good investment news. As we turn our attention to 2018, I am focused on six important themes.
1. The economic recovery and bull market in stocks, which began in 2009, are in their late innings. According to the National Bureau of Economic Research, the average length of economic expansions since 1945 has been 59 months. The current expansion is now 105 months long. As I mentioned, most economic indicators point to continued growth, but it would be dangerous to assume that a recession will not occur in 2018. Economic recessions happen for a variety of reasons and at irregular intervals. They will occur again in the future. We should all be prepared.
Likewise, the bull market in stocks is "long in the tooth." By my measure, the current stock bull is the second oldest since World War II. Only the big, technology-fueled market of the 1990s lasted longer. That doesn't mean the current market can't continue to advance and make a new record, but it does give me reason to be increasingly cautious.
2. Speculation is again creeping into the markets. Whereas residential real estate prices in 2005 and technology/internet stocks in 1999 saw speculative buying push those asset prices too high and too fast, today's speculative action seems to be happening around the new phenomenon of cryptocurrency.
To be fair, I am far from an expert on Bitcoin and other digital currencies, but I do know a bubble when I see one. I'll sit this one out and probably so should most investors. Be aware of other potential speculative bubbles forming in 2018.
3. Fear of the big market meltdown in 2008 is fading. Many newer market participants were not even impacted, and those who were and stayed the course have likely seen their investment portfolios recover and reach new highs. As the fear fades, greed is slowly taking its place. Remember the Warren Buffet admonition, "Be greedy when others are fearful, and fearful when others are greedy."
Also, beware of letting your allocation to stocks increase solely because the stocks in your portfolio are currently doing well. If five years ago you felt comfortable with a 50 percent allocation to stocks, for example, and that allocation has been helping you achieve your investment objectives, don't let that allocation increase simply because the stock market is at all-time highs.
4. A stock market correction in 2018, if it occurs (it almost certainly will) is going to feel dramatic. Corrections in the stock market, generally defined as a 5 percent to 20 percent drop in prices, happen frequently. In fact, it is a rare year when they do not. 2017 was such a year.
Therefore, investors might very well be shocked in 2018 if a normal correction occurs and sends the Dow Jones down 4,000 or more points in a short period of time. It would be a normal correction at around a 15 percent drop, but it will feel dramatic. If this happens next year, don't panic.
5. Although we are in the later part of an economic expansion and bull market, there is no reason to believe the party is over. Until the economy enters the next recession, it is entirely possible the stock market will continue to make new highs in the months ahead.
However, in my observation, there are certain industries and stock sectors that tend to outperform in the late innings of a bull market. Often, the best sectors are consumer staples, energy, healthcare and utilities. It may also make sense to lower exposure to more economically sensitive sectors such as consumer discretionary and industrials. Finally, quality may be key in 2018. Stretching for high-yield investments (junk bonds, for example) may also expose you to higher risk in an economic downturn.
6. Watch the economic data with interest, and be prepared with a plan of action should the economy begin to falter. To do so, you needn't become obsessed with every economic data point. But certainly it may be wise to watch the Leading Economic Indicators (produced by the Conference Board, among others).
If the economic data begins to deteriorate, you should have an investment strategy already designed to help you weather the approaching storm. Economic history is fairly clear on this point; most lasting damage to investors tends to happen during recessions when a normal correction morphs into a full-fledged bear market and prices drop in excess of 20 percent. Don't wait until the storm arrives to develop a plan.
Jonathan Lokken, CIMA is managing principal of Lokken Investment Group LLC in Lewes. He has been professionally managing client investments since 1997. For more information, go to www.lokkeninvest.com or call 302-645-6650.
Disclaimer: The foregoing content reflects the opinions of Lokken Investment Group LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance is not a guarantee of future results. All investing involves risk. Asset allocation and diversification does not ensure a profit or protect against a loss.
