When ﬁnancial market historians look back at 2017, the year probably will be highlighted for its tightly compressed levels of volatility. Another notable aspect of the year is that, heading into late December, there has not been a single month of negative returns for the S&P 500 index. It’s an impressive gain, especially being notched in the eighth year of an expansion.
As we look forward to 2018, it’s helpful to consider not only what the capital markets will deliver, but also what they have the potential to deliver. We are reminded that the starting point matters: our work suggests the robust returns which equities and bonds have produced over the past ﬁve years have extracted a certain amount of future return potential from our equilibrium assumptions. Our methodology assumes that markets will achieve equilibrium over the 10-year horizon. To a certain extent, returns that the S&P 500 index has delivered in recent years have borrowed from future potential gains.
Among the unusual hallmarks of this expansion has been how well-anchored bond yields have stayed in the face of strongly rising equity markets. Lack of inﬂation too has been noticeable, wage and price pressures usually accompany aging growth cycles. A dearth of capital investment also has plagued this cycle. These issues, while not new, again confront investors as they think through portfolio positioning for the ninth year of this economic expansion. We have given these issues a great deal of research, which we share with our readers in the Macroeconomic section — with investment thought leadership on the business cycle and inﬂation.
Past performance does not guarantee future results.
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