Wall Street forecasting more gains

WORLD ECONOMIES ARE GROWING IN SYNC

Wall Street is forecasting another year of gains for stocks in 2018, even as worries rise that the end may be nearing for one of the market’s greatest runs in history.

The Standard & Poor’s 500 index has nearly quadrupled since the dark days of early 2009, and this bull run of eight-plus years is well into senior-citizen status. Only the rally of 1990 to 2000 lasted longer. But analysts see several reasons this bull market isn’t ready for retirement. Chief among them: Economies around the world are growing in sync.

The global gains, along with the lower tax rates that Congress just approved, should help companies pile their profits even higher. That should provide more life for the market, analysts say, because stock prices tend to follow the path of corporate profits more than anything else over the long term. Plus, interest rates are expected to remain relatively low, which can raise investor appetite for stocks.

The expected gains aren’t as strong as in the past few years, however. For one thing, stocks are expensive. There are also concerns that a growing economy could eventually spark inflation.

Another gain for stocks in 2018 would be the latest step into record territory for a market that’s been maligned and doubted since it emerged from the rubble of the global financial crisis. Investors have been hesitant to fully embrace stocks after watching the market lose more than half its value from late 2007 into early 2009.

“No one seems complacent” about the market’s performance, said Rob Lovelace, vice chairman of the Capital Group, whose American Funds family of mutual funds invests $1.5 trillion. “Everyone seems scared as heck. We’re continuing with the pattern of this being one of the most untrusted, unloved bull markets.”

Most of the predictions indicate investors shouldn’t expect returns to be as big or as smooth as they have been.

“The sky is not falling, but our market outlook has dimmed,” economists and strategists at mutual-fund giant Vanguard wrote in a recent report.

Over the last five years, investors have enjoyed an annualized return of more than 15 per cent from S&P 500 index funds. In the coming decade, Vanguard expects annualized returns for global stocks to be closer to the 4.5 per cent to 6.5 per cent range, with U.S. stocks likely returning less than their foreign counterparts.

For 2018, strategists at Goldman Sachs say the S&P 500 may end the year at 2,850. That would be up roughly six per cent from its close Wednesday. Strategists at Morgan Stanley have a base target of 2,750, which would be less than a three per cent gain.

A big reason for the relatively modest forecasts is how expensive stocks have become. The market has been rising faster than corporate profits, which makes it less attractive than in years past.

The S&P 500 is close to its most expensive level since the dot-com bubble was fizzling out, according to one measure popularized by Nobel prize-winning economist Robert Shiller that looks at stock prices versus corporate profits in the last decade.

That’s why many investors are increasingly turning their attention abroad for stocks. Investors have poured $227 billion into foreign stock funds over the last year, six times more than they put into U.S. stock funds, according to Morningstar.

Europe is earlier in its economic expansion, which could mean it has further to run.