Wall Street in 2018: The biggest risks for stocks
NEW YORK: Wall Street’s rally could have another leg up next year thanks to a sweeping tax cut and economic momentum, but investors are counting the risks that could abruptly end the party.
The S&P 500 is up about 20 per cent with less than a week to go of 2017, and many strategists expect the bull run that began in 2009 to extend into next year, albeit with smaller gains. Optimism is high following sweeping tax cuts passed by Congress last week that are expected to give an added boost to corporate profits next year.
But strategists and investors highlight these risks for the year ahead.
The pace of interest rate hikes, particularly after stronger economic data, could derail the market, say some. The US economy grew at its fastest pace in more than two years in the third quarter.
Wall Street’s top banks expect the Fed to raise US interest rates three times in 2018, matching the number of rate hikes this year and the central bank’s own outlook.
“That will be a risk for the market,” said Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago. “You’re going to risk inverting the yield curve at that point and provide a reasonable competition to equities.”
Some strategists fear inflation will accelerate too quickly as economic growth picks up, creating margin pressure and putting pressure on the Fed to bump up rates faster than investors expect.
“Inflation could be a global game-changer for stock and credit markets,” Bank of America Merrill Lynch analysts said in their 2018 outlook this month, adding that wage inflation was potentially the most important factor for the stock market.
Investors will pay close attention to next year’s midterm elections. Democrats are hoping to reclaim seats in Congress, now controlled by Republicans.
“If the Republicans lose the House or Senate, or both, then that would probably be a big negative for the market,” said John Praveen, chief investment strategist at Prudential International Investments Advisers LLC in Newark, New Jersey. “The market would begin to worry that... the Trump agenda will be stopped in its tracks.” — Reuters