Stock Market Forecast for the Next Three Months
The Dow is approaching 26,000 points. Wall Street continues to rise in the wake of the corporate tax break announced just before Christmas. Thus, the market rally continues and nobody seems to care that the tax break risks pushing U.S. debt to the point of no return. Therefore, it’s hardly surprising that stock market predictions for the next three months (Q1 2018) remain bullish—at least according to mainstream logic.
The new year started like a thoroughbred at the Kentucky Derby. The markets have established new records. It would almost seem foolish to entertain anything but an optimistic, if not downright bullish, stock market forecast in 2018. It’s been a long time since investors have seen anything quite like this market, which appears to want to continue setting records. The last time that anything like this was seen was in 1987, according to the charts. Many of us remember how that year ended.
2017 Was Not Like 1987
On October 19, 1987, the world markets collapsed. It was the biggest single crash for the Dow Jones since 1929. The market lost over 22% that day. It came in the wake of new records and the Reagan-era tax cuts. Middle East tensions were also high as Iran kept a tight control in the Strait of Hormuz and oil prices fluctuated on the mere rumor that oil tankers faced risks. But in the 1980s, the economy survived. It even thrived. It was, however, a much different type of economy.
There was no Internet, outsourcing was in its infancy, and analog jobs—the kind with union backing and salary protections—were plentiful enough that present-day income gaps did not exist yet. Moreover, in the 1980s, far fewer Americans were invested in the stock market. Should history like to repeat itself, the 30-year anniversary of “Black Monday” should have happened last year. But the market remains in euphoria mode, which should remain over the next three months. Yet, this is the eerie calm before the storm, because the stock market outlook for 2018 may reserve a potential financial catastrophe.
Stock Market Predictions for Q1 2018
The equity sector appears to be healthy so far, but Warren Buffett himself has reservations about what the rest of 2018 holds. Many expect emerging markets to grow and car sales in Europe have peaked to levels not seen since the period preceding the financial crisis triggered by the September 2008 crash.
The big difference between 2017 and 1987 is that interest rates hovered between 6.75 and 7.75% then. Inflation was higher than today and the GDP was growing at 3.5%. (Source: “Fed Funds Rate History: Highs, Lows and Chart With Major Events,” The Balance, January 15, 2018.)
In 2018, on the other hand, monetary policy remains largely accommodating despite a massive tax reform, which has cut corporate taxes by 30%.
That monetary policy is the glue that’s holding the market together. But forces are pulling at it and the longer the market avoids going into correction mode, the bigger the chance of a major crash in 2018. All it takes is one of those events, which many like to describe as “black swans” (rare and unexpected events), to potentially trigger an equity avalanche.
Too many investors have become complacent. They are either unaware of the risks or choose to wear blinders to avoid thinking about them. Those who entered the market, gobbling up the ruins left by the 2008 subprime disaster, have never confronted a major crisis. They have no idea of the extents to which investments can lose their value in minutes. They have become addicted to the upside.
This has fueled complacency if not downright smugness or overconfidence. That’s why the stock market outlook for 2018 must include room for a “Plan B.” The incredible performance of the market in 2017, resilient enough to absorb every possible risk factor, from possible presidential impeachments to North Korea’s determination to acquire nuclear weapons and the rise of a new Cold War with Russia, is such that investors expect more of the same.
This may work for the first quarter of 2018. But as the tremendous performance of defense stocks like Lockheed Martin Corporation (NYSE:LMT) has shown, the world faces risks that go far beyond the economy in 2018. And they’ve been building and accumulating to the point that no serious investor can ignore them. It may be time for some profit taking before the dark clouds arrive. They’re on their way.