401(k) investors: Risks, rewards for rest of 2018

It has been a bumpy ride for your 401(k) this year, especially after the big gains and smooth glide higher in 2017.

The broad stock market did manage to rise nearly 3 percent during the three-month stretch from April through June, despite escalating trade tensions between the U.S. and its trading partners.

So what opportunities and risks should investors watch out for during the second half of 2018?

First, it’s important to remember there are still enough good things happening in the U.S. economy to keep the stock market’s 9-year-old bull running, according to mutual fund managers and equity strategists.

“I continue to be relatively optimistic,” said Brian Levitt, senior investment strategist at OppenheimerFunds.

Levitt’s general thinking is plentiful jobs, confident consumers and strong corporate profits should enable the market to overcome well-publicized worries, such as tariffs, rising interest rates and political uncertainty as the midterm elections near.

Even with their ups and downs this year, stocks have been ultimately resilient. The market bounced back from its first 10 percent drop since 2011 earlier this year. And more recently it has held together despite periodic downturns sparked by fears of a looming trade war between the U.S. and China, the world’s two biggest economies.

Led by big technology and smallcompany stocks, all of the major U.S. stock indexes finished the April-June quarter with gains. The big winners were the small-cap Russell 2000, which rose 7.4 percent, and the tech-dominated Nasdaq composite, which rallied 6.3 percent. The broad Standard & Poor’s 500 rose 2.9 percent, and the blue-chip Dow Jones Industrial Average gained 0.7 percent.

Brian Belski, chief investment strategist at BMO Capital Markets, said investors have focused for too long on the negatives and not on what is going right

in the U.S. economy. Too many investors, he said, are reacting emotionally to the headlines and extrapolating worst-case scenarios when it comes to challenges such as the tit-for-tat trade fight to fears that corporate earnings have peaked and can’t get better.

“The market is being convicted (using) circumstantial evidence, and that type of investing will fail,” Belski said. “The business fundamentals in the U.S. are in great shape. People should ignore the negative rhetoric.”

Still, Wall Street pros aren’t calling for another year of 20 percent gains for stocks, which happened in 2017. Instead, they see gains of 5 to 10 percent from current levels. They also expect bouts of turbulence along the way as the market reacts to headlines.

Here are the risks and rewards:

Trade war

While many Wall Street pros still believe the U.S., China and other trading partners, such as the EU, will come to their senses and not engage in a fullfledged trade war, there remains downside risk related to trade barriers being erected around the globe, said Brad McMillan, chief investment officer at Commonwealth Financial Network.

“The Trump administration’s trade policies have the potential both to disrupt supply chains and increase costs, which would certainly affect financial markets,” McMillan said.

The Fed

The market could balk at the Federal Reserve’s plan to keep pushing ahead with interest rate hikes, with two more telegraphed for this year, bringing the total to four for 2018, one more than Wall Street had forecast earlier. With rates rising, investors will be less likely to push stock valuations higher, which could keep a lid on stock prices, Goldman Sach’s U.S. equity strategist David Kostin said in a research note.

Midterm elections

Congressional elections have a history of causing market turbulence, said Sam Stovall, chief investment strategist at CFRA, a Wall Street research firm in New York. For the S&P 500, the average daily price volatility, which measures price swings, has been 34 percent higher in the third quarter of midterm election years than in all non-midterm election years since 1945, Stovall said. The fear is that the Republicans could lose control of Congress, creating political and policy uncertainty for the Trump White House.

Late-stage winners

So what types of stocks should do well as the economic expansion and bull market move into later stages? Levitt likes stocks that tend to fare well when the economy does well, so-called cyclical stocks. He’s still bullish on tech stocks, despite a strong run this year and expensive valuations, due to their ability to grow their businesses and their earnings at a fast clip.

Other companies on his buy list are consumer stocks, especially ones that sell people discretionary items they don’t really need as opposed to everyday goods such as milk and toilet paper. Biotech stocks should also fare well, he said.