Stock Market Investment Likely to Prove a More Exact Science in 2018

Although Brexit nerves meant that stock markets in the UK didn’t quite hit the same spectacular returns as those in the U.S. and many parts of Europe and Asia, 2017 was still a reasonably good year for the LSE. Over on Wall Street, however, gains were quite spectacular. The S&P 500 has returned 20% over 2017, compared to an average of 8.5% since 1945. Volatility was also extremely low with moves of over 1% in a day happening on only 8 occasions compared to the historical average of 50.

In short, over the course of this year, on most stock exchanges but particularly over in the USA, it has been quite a task to not achieve good returns. The signing into law of Trump’s tax cuts shortly before Christmas stoked optimism next year could perhaps prove to be another strongly positive one for equities markets. However, a note of caution should be sounded. Markets tend to rise more on the prospect of positive developments rather than their materialisation. By the time something passes into fact stock prices have usually already priced it in. The more common scenario is a fall in price if a positive expectation fails to materialise.

While Trump’s tax cuts will likely provide at least a temporary boost to markets, the extent and duration of the impact may be less than many hope for. Firstly, most of the larger companies that have driven much of recent gains, notably the tech giants, have not in any case been paying 35% tax. Most thorough analysis points to a more modest 6% average increase in earnings resulting from the move.

This means valuations are not as stretched as they had been looking and will likely provide some support to current levels. However, it’s almost certainly not going to be the driver it has been trumpeted as. However, for those investing online it will provide some interesting opportunities at a sector level. This is especially the case for sectors where corporate tax levels have the greatest impact such as in financials and energy stocks. Financials should also benefit next year from increasing interest rates.

Many analysts believe the most likely scenario for 2018 are stock markets that move largely sideways. The argument is that most of the drivers that have proven to be the engines of the 9 year bull run have already played out. The strength of gains in 2017 are also likely to have an impact, with this year having had more than its fair share. This doesn’t mean that stock markets will have a bad year but that it may well be too late to realise significant gains through passive index investing so late in the cycle. Choosing the right sectors and particular stocks is likely to be far more important next year.

Those investing in 2018 would also be well advised to put more research into the stock markets in which they invest. European and Japanese stocks are considered by many to be the most promising for the coming 12 months with a stronger dollar providing a boost. The UK may also a promising market having shown less growth in 2017 than many others. While Brexit uncertainty won’t be solved next year, the FTSE 100 companies are largely internationally focused.