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From bonds to Bitcoin, six market insights for the New Year

On January 30, 2018, Ben Webb, CFA Balentine’s Director of Manager Selection and Implementation, will serve as a panelist at the Atlanta Society of Finance and Investment Professional’s annual Media Forecast Dinner. As part of this panel, Ben was asked to share some market insights for 2018 and beyond.

Typically, New Year’s brings with it two traditions: resolutions and goals. In the investment and wealth management world, it is also a time of forecasting what the coming year will bring. Each year, Balentine’s Investment Strategy Team releases its Capital Markets Forecast with projections for more than 30 asset classes during the next market cycle. We also look at macroeconomic trends and how they might impact portfolios from today’s starting point. Below are some items to watch in 2018 and beyond:

  1. Bull markets don’t die of old age. We are currently in the second-longest bull market in history. While some may worry about the aging bull market, as the old adage goes, bull markets don’t die of old age! The stars seem to be aligning for equity markets to continue their run in 2018. While this could be derailed by a policy misstep from Washington or the Federal Reserve, don’t get distracted by the noise. Instead, let the momentum of the market tell you when the dance is ending. Geopolitical issues can also have an effect, but tend to be short-lived.
  2. Tax reform could be junk food, or it could be nutrition. The biggest news of the fourth quarter was, of course, tax reform.[1] The intermediate effect of tax reform will depend on whether the markets view it as a one-time boost, with companies simply using it as an opportunity to return money to investors (i.e., junk food), or if it causes the rate of business investment and productivity growth to increase, thereby providing a steady tailwind to markets (i.e., nutrition).
  3. Seek returns outside of U.S. large cap growth. Look for the trend of international equity outperformance to continue throughout the current market cycle as valuations remain compelling and momentum remains in favor. Consider mixing up the binary investment decisions of growth or value with sector investing, as many good sectors can be hidden in unfavorable styles.
  4. Keep it simple in high-quality bonds. While bonds are not as attractive as they once were (given where yields are and may be going), they give investors the courage to own stocks. Dependable, inexpensive access can be achieved with high-quality bonds via separate accounts or even ETFs. Generally speaking, high-yield bonds or bank loans are equity risk premium in disguise and should be categorized as such.
  5. Return dispersion could prove a fertile ground for active management. Correlation among both individual stocks and equity sub-asset classes continues to drop. This could lead to a successful year for stock pickers and asset allocators who have stuck to their knitting through the hard times.
  6. Watch Bitcoin and friends from the sidelines. While 2017 saw a bubble in calling bubbles, it is too early to tell if cryptocurrency will be the next one. As the saying goes, “While history doesn’t repeat itself, it certainly rhymes;” simply look to the tech boom and bust for a playbook on this “asset class.” When the Amazons, Ciscos, and E*Trades emerge from the rubble, it may be time to join in.

Balentine CIO Adrian Cronje will be discussing the implications of tax reform for business owners in depth at the upcoming 2018 CEO Strategy Summit.

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