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Posted on January 8, 2018

Will 2018 be another banner year for the stock market? Financial experts make their forecasts

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Make it two in a row for the former stockbroker who is now a business professor at the University of Nebraska at Omaha.

For the second straight year, George Morgan has won the annual Omaha World-Herald equity challenge, having made the most accurate forecast for the 2017 closing of the Standard & Poor’s 500, beating out a slate of competitors that includes the area’s top money managers and wealth advisers.

Before 2017 started, Morgan forecast to The World-Herald (in a standard questionnaire the newspaper uses for all respondents queried for the predictions) the S&P would close 2017 at 2,610. That was within 64 points of the actual closing of 2,674, and the most bullish year-end prediction among the 10 respondents. Morgan’s nearest rivals for the top spot missed the S&P’s 2017 close by almost 200 points.

For 2018, Morgan expects another banner year for U.S. stocks. He predicts the S&P will rise 16 percent from its 2017 close to finish 2018 at 3,105. Morgan’s is again the highest forecast among the eight respondents, who are either experienced college finance professors or portfolio managers or research directors at area wealth managers. Three other respondents predict the index will rise by more than 10 percent, while two others expect around 3 percent or worse.

As for Morgan’s bullishness, he says that while people might disagree about politics, the new presidential administration ushered in last year got back to the business of America: business.

“I expected the Trump administration to have a major impact and I have not been disappointed,” said Morgan. “The market is where it is today because of their major shift in attitude to the economy and business. … The tax reforms passed by the Congress should keep the momentum going into 2018.”

Other forecasters agree the effects of maneuvers such as the tax cut will bear again this year. Ted Bridges is the head man at Omaha’s Bridges Investment Management and is one of the bulls expecting an increase of more than 10 percent.

“A key issue for 2018 and into 2019 is how corporate tax savings are ultimately deployed by corporations, with adroit and efficient capital allocation being critical and offering an opportunity for company management to distinguish itself,” Bridges said. “Companies that effectively capitalize on tax reform” might well see an increase in share price.

As always, interest-rate policy figures into the reckonings of professional money managers. Jeff Sharp, principal at Omaha’s SilverStone Group, said he will keep an eye on the financial sector, whose fortunes might rise with interest rates, as they invest heaps of money in interest-bearing instruments on a regular basis.

“If we get any lift in interest rates, the banks, brokers and insurance companies should do well,” said Sharp, who also predicts the S&P 500 will rise 16 percent. “An added tailwind will be the reduction in corporate tax rates, as this sector benefits more than, say, technology stocks.”

Sharp, who described the 19 percent gain in the S&P 500 in 2017 as “what a year … blowing away projections,” said investors began pricing in the prospect of a corporate tax cut last year even before it was passed. But he, too, said the effect will likely be felt for some time.

“Reduced taxes help corporate earnings, and ultimately it is earnings that drive price per share of equity securities.”

The forecasters acknowledged they are monitoring U.S. stocks for signs of weakness. One of them is Scott Kubie, chief investment officer at Omaha-based Carson Group. He is forecasting only less than 3 percent in the S&P 500, citing the prospect of a correction early in the year, or a temporary decline of at least 10 percent.

Investors should get ready “for sharp downturns in the market,” Kubie said, saying stocks have risen recently on low interest rates and slow, steady gains minus severe upticks or downturns — what professional investors call low volatility. But volatility can snap back in a flash and surprise anyone not paying close attention.

“Stocks have produced high returns relative to their volatility,” Kubie said.

Kubie also said he expects increases by the U.S. Federal Reserve in benchmark rates.

“Three hikes seem likely in 2018,” Kubie said. “Hints of inflationary risk will push longer rates higher, and the 10-year bond will rise around 1 percent next year.”

Josh Jenkins, a portfolio manager at Omaha-based CLS Investments, agrees that “U.S. stocks have become expensive by historical standards.” He said that doesn’t mean it is time to panic about a major sell-off.

“Historically, when the market has gotten as expensive as it is today, forward returns are well below normal but remain positive on average,” Jenkins said. “Our broad expectation for 2018 is for the stock market to continue to move higher but at a more moderate pace. We expect returns to be somewhere in the low to mid-single digits.”

Jenkins said investors should expect some trends to continue and others to reverse. He expects value stocks to begin outperforming growth stocks, as the relative performance of growth over value has diverged “to extreme levels,” which often portends a reversal. Jenkins also expects it to be a good year for international stocks.

Creighton University finance professor Gerald Jensen also expects modest growth.

“I expect fairly subdued stock market returns for 2018 as I believe the current market level fully incorporates investor optimism regarding future actions on the tax, regulatory and infrastructure fronts,” Jensen said. “Nearly perfect conditions, as represented by a combination of low interest rates and strong earnings growth, are required to justify” current stock valuations.

As for bright sides, Jensen points to rebounding consumer spending. In October 2016 the Conference Board Consumer Confidence Index was 103.74, rising 25 percent by November 2017.

“The November 2017 value is the highest recorded since year-end 2000,” Jensen said. “Overall, I am optimistic about future economic conditions, but I believe stock prices have stretched beyond current fundamentals, and it will take some time for market fundamentals to catch up with lofty investor expectations.”

Mark Wynegar, president of Omaha’s Tributary Capital Management, said growth in gross domestic product of around 3 percent this year would be an improvement from recent years and aid corporate results, with earnings growth for the S&P projected to be slightly above 10 percent.

“That would be generally supportive of continued gains in the market,” Wynegar said.

But what degree of gains is the question, and at what velocity will they come? Wynegar, too, cautioned that 2017 was exceptional in its lack of large price swings, with a “few small downturns,” none surpassing 3 percent.

“The key will be valuation,” Wynegar said. “Does the market continue to pay more for each dollar of earnings? Do we revert to more historical levels? Or do we remain at the same elevated level?”

Dan Feltz, principal wealth adviser at Omaha’s Feltz WealthPlan, said 2018 will not be quite as good as last year for U.S. stocks, while still forecasting a gain.

“A correction is always possible, but we think it would be wise for investors to stay in equities throughout 2018,” Feltz said, citing stimulus from the corporate tax cut, the prospect of growing corporate earnings and growing overseas economies that could “extend this seventh inning U.S. economic expansion into extra innings well into 2019 or 2020.”

Caution is warranted, however.

“As expected with the later stages of an economic expansion and bull market, investors should anticipate the markets to narrow and may want to be selective in the sectors and stocks they own,” Feltz said.

“Sectors that could do well in this period of positive earnings growth, low interest rates, low to moderate inflation and a lower tax environment are financials, industrials, materials and technology,” he said.

Utilities, consumer staples and bonds are expected to underperform in 2018 due to rising interest rates, Feltz said.

Omaha World Herald

 

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