Positive global economic growth and stronger investor sentiment have helped fuel equity market gains worldwide in 2017. And as inflation slowly builds and central banks around the world reduce their extraordinary stimulus, fixed-income yields have been rising.
With bond yields and equity returns on the move, many investors are understandably cautious and are asking logical questions. Questions like:
Is the end of the bull market in sight?
This is by far the question we get the most. The economic recovery is maturing.
Now, make no mistake, the later years in the economic expansion can be among the best for returns, but they’re also a time when strong optimism can drive markets ahead of themselves, above and beyond what the underlying fundamentals can support over time.
If rewards are low, why take more risk?
In 2018, we believe investors will be challenged to balance risk and reward. Historically, as economic expansions mature, equity prices tend to rise faster than their fundamentals improve, while exuberance in bond markets can compress yields into ever-narrowing credit spreads.
Sentiment can ebb and flow during an expansion, and given our outlook for more modest returns across asset classes in 2018, we now see investors in some markets taking on more risk than we believe is necessary.
It may be tougher today to find investments that either trade below their intrinsic values or that are fundamentally cheap, but we want to encourage vigilance so that investors are alert to when and where market optimism is detaching prices from their underlying values.
Where are the investment opportunities around the globe?
We believe international equities are earlier in the recovery cycle than U.S. equities, and we see better growth potential in developed markets and emerging markets than we see in the U.S.
We encourage investors to rebalance their portfolios after 2017’s big U.S. market run-up.
Above all, we recommend that investors stay engaged with their investment plans. Investors usually prioritize returns, but a basic principle of investing is — and should be — to try and limit the losses in their portfolio.
And those losses often come from taking unintended risks. So, our report is really about considering risk and return more closely and maybe in new ways, especially being more global.
For more information on where we see opportunities in 2018, and to learn which investment themes we’re watching in the coming year, download our Wells Fargo Investment Institute 2018 Outlook report titled Moving Ahead in an Aging Recovery.