Global stock markets will rise further in 2018, even as the era of low inflation, bond yields and volatility has come to an end and the rocket fuel behind a bull run that began in 2009 is running dry, a Reuters polls of strategists showed.
After nearly a decade of ultra-easy monetary policy, major central banks now appear to be moving roughly in the same direction towards policy tightening, albeit at differing speeds.
Bond yields have climbed and stocks have been reined in somewhat on concerns that inflation will pick up and U.S. government borrowing will surge to fund a budget shortfall after the Trump administration’s tax cuts and new spending plans.
While world stock markets enjoyed a record 15-month winning streak in January on strong economic growth and solid company earnings, they plunged earlier this month as U.S. Treasury yields soared to a four-year high on fears interest rates will rise faster than expected.
U.S. stocks suffered their biggest daily drop since that selloff after comments from Federal Reserve Chairman Jerome Powell on Tuesday revived those concerns of faster policy tightening.
Still, more than 200 equity strategists and brokers around the world polled by Reuters expect all but one of 17 indexes to build on the recent recovery from this month’s sell-off and rise further through to the end of next year.
Analysis of Reuters Polls shows strategists were accurate with their predictions in late 2016 on the direction for last year’s performance for 11 of 17 indexes.
But predictions were either too pessimistic or too optimistic for all but one of those markets. They were spot on with their predictions for the end of 2017 for Mexico’s main index.
In the latest poll, bullishness was tempered on rising global bond yields and expectations for increased volatility.
About 80 percent of over 50 strategists who answered an extra question said the period of low inflation, bond yields and volatility is over.
“We do see inflation, bond yields and volatility all higher in 2018 than levels we were at in 2017. Better economic growth and more fiscal stimulus will put upward pressure on inflation and interest rates this year,” noted Darrell Cronk, president at Wells Fargo Investment Institute.
“We would find it difficult to imagine that we will return to the lows in volatility during the second half of 2017.”
Volatility spiked during the deep sell-off in equities and all but one of 82 specialists who answered a separate question said the CBOE Volatility index this year will stay above its average of 11 percent over the past year.
Twenty-seven of 81 respondents said it will roughly average 10-15 percent, 44 said 15-20, eight said 20-25 and two said 25-30 percent.
A robust U.S. economic expansion that is expected to be supported by additional fiscal stimulus and higher profit growth will boost Wall Street, the poll found. The recent sell-off makes valuations look less stretched than in January. [EPOLL/US]
The benchmark S&P 500 is forecast to end this year about 8.5 percent above 2017’s finish and up 4.3 percent from Monday’s close.
“Things are actually less expensive because of the powerful earnings (growth) and to a certain extent the market pulling back,” said Jonathan Golub, Credit Suisse’s chief U.S. equity strategist.
“We’re in this nice place where things are moving forward but the risk that something goes wrong has been contained.”
Canada shares are forecast to rise to a record high by the end of the year as the prospect of higher global inflation boosts appeal for its resource shares.
European shares were also expected to bounce back, according to strategists who also said the things that supported European markets in 2017 will continue to do so even if the market is now more volatile.
But concerns over the terms of Britain’s exit from the European Union and rising volatility will hold back the FTSE share index from rising above its record high in the next two years.
Emerging economies’ stock markets are expected to underperform developed ones as risks from huge fiscal deficits remain and on higher global interest rates.
When asked what will be substantially affected by any sharp moves in U.S. stocks, the top pick was emerging market shares.
“If the U.S. experiences sharp moves this year, everything will be affected,” noted David Joy, chief market strategist at Ameriprise.
Indian stocks are expected to recover most of their recent losses, helped by strong corporate earnings, but will close out 2018 a little short of the record high hit at the end of January.
Brazil’s market rally is expected to head into a third year on strong growth expectations but the government’s inability to plug a fiscal deficit could put a lid on those gains.