Fast Out of the Gate

"Life is largely a matter of expectation." –  Horace

Quintus Horatius Flaccus (65 27 BC), known as Horace, was considered the leading Roman lyric poet during the time of Emperor Augustus. Themes in his works include politics, love, philosophy, ethics, and poetry itself. Horace is sometimes considered the first autobiographer, having written often about his own life and character.

Executive Summary

In this month’s Investment Outlook we address the breakneck start for equity markets in 2018 on the heels of tax reform legislation passed in late 2017. We discuss:

  • markets out of the gate in 2018 and what this may portend for the rest of the year;
  • possible tax reform legislation effects on corporate earnings and the economy; and
  • market considerations and the importance of rebalancing.

Markets have been in a strong bull pattern since the dark days of 2009, and were strengthened by the late-December passage of the Tax Cut and Jobs Act of 2017. U.S. stocks have gotten off to a quick start in the first weeks of 2018 with the S&P 500® up over 6% in the first four trading weeks of the year. The S&P 500, Dow Jones Industrial Average, and NASDAQ indexes have set all-time record highs. While this level of performance has emboldened some investors to become more aggressive, we think it is worth remembering that even good markets have pullbacks and corrections. U.S. stocks have gone longer than normal since a marked pullback.

The tax cuts and repatriation have the potential to unlock significant cash for U.S. corporations which can be used to fund buybacks, increase capital spending, for merger and acquisition activity, and to return capital to shareholders. Companies may also use the cash to reduce leverage. Earnings estimates for 2018 have begun to climb higher with the commencement of the fourth-quarter 2017 earnings season in mid-January, as forward forecasts attempt to quantify the upside potential for 2018 corporate profits. This has helped add momentum to equities. We also believe continued global growth will be supportive of earnings from a macro perspective, in addition to stability in oil prices and a generally accommodative environment.

The short-lived government shutdown was shrugged off mostly by markets, as strong earnings released at the same time of the negotiations helped override most concerns. It was also expected, as history has shown, that shutdowns are generally short in nature.

We believe a well-planned investment strategy, tailored to the needs and risks of the individual, remains the best roadmap for superior long-term performance. It is our view that a systematic approach to asset allocation includes a periodic rebalancing process, whereby a regular readjustment to a portfolio is necessary to maintain the targeted asset allocation. Over time, one asset class may outperform another in a meaningful way, moving the allocation away from intended targets.

PNC expects the economic expansion to continue in 2018, forecasting GDP growth of 2.7%. The tax reform legislation enacted for 2018 is helping boost stock prices and disposable incomes, and a tighter labor market is supporting wage gains. Collectively, these developments are favorable for another solid increase in consumer spending in 2018. Business capital expenditures, energy production, and exports are also improving, supported by higher oil prices and a weaker dollar.

While we acknowledge the difficulty for us, or anyone, to predict with great accuracy the short-term behavior of stocks, we feel investors should continue to focus on their long-term goals, working with their PNC advisors to develop an asset allocation that matches their risk and return objectives.

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Fast Out of the Gate

Travis E. Dragan, CFA®, FRM
Senior Fixed Income Strategist

Rebekah M. McCahan
Investment Strategist

Paul J. White, PhD, CAIA®
Senior Portfolio Strategist

For more information, please contact your PNC Advisor or call 888-762-6226 to request an appointment with a PNC Wealth Management Professional.

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