Characteristically, this bull is aging on its own terms, and strategies that worked at comparable periods in past markets aren't appropriate now. But investors who choose investments wisely in this late-stage (but not end-stage) bull market should prosper. Because it's the season, consider a baseball analogy: We may be into—or even past—the seventh-inning stretch. But fans who leave the game early risk missing some of the best plays.
In our January outlook we forecast an 8% return for the year, including dividends—and investors have earned 6.2% so far. Although we rightly factored a market correction into our forecast, we could not incorporate the impact of the new tax law because it wasn't yet a done deal. With tax cuts now on the books and corporate earnings getting a boost as a result, and with the global economy soldiering on, we are raising our year-end forecast. Expect the S&P 500 to finish the year at 2900 or a bit higher, equivalent to about 26,500 for the Dow Jones industrial average. That's roughly a 7% to 8% price increase from here, and about a 15% total return for the year, including almost two percentage points from dividends. (Prices and returns in this article are through May 18.)
An Economic Milestone
Like the bull market, the economic expansion is also in its 10th year and in June 2019 will tie the record 10-year boom from 1991 to 2001. It's not surprising that market watchers are on the lookout for signs of a slowdown, given that most bear markets are associated with recessions. (Market tops precede recessions by seven to eight months, on average.) But the enormous fiscal stimulus of lower tax rates and increased government spending—some $800 billion in 2018, according to Strategas Research Partners—has given the economy a shot in the arm, inoculating it for now against ill effects from rising oil prices, trade tariffs, higher interest rates and other negative surprises.
Economic indicators with the best records for predicting recessions, including initial unemployment claims, auto sales and industrial production, are far from levels seen at the start of the previous seven recessions, according to a Bank of America analysis. Economists at Goldman Sachs assign only a 5% probability of recession within the next 12 months and only a 34% probability during the next three years. "My working hypothesis now is that the expansion continues as far as the eye can see," says economist and strategist Ed Yardeni. Kiplinger expects economic growth of 2.9% in 2018, up from 2.3% in 2017, and the unemployment rate to finish the year at 3.8%—which would be the lowest rate since April 2000, when 'NSync ruled the airwaves and Erin Brockovich was a top-grossing film.
An economic red flag that spooked the market earlier this year looks like a false alarm for now, but it bears watching. A narrowing of the gap between yields of short-term and long-term bonds, known as a flattening of the yield curve, can signal the kind of aggressive Federal Reserve tightening that can choke off economic growth. An inverted yield curve, which occurs when short rates are higher than long-term rates, has been a reliable sign of impending recession. But short yields must actually edge their long-term counterparts before a recession warning materializes, and we're not there yet, with two-year Treasury notes yielding 2.6% and 10-year notes topping 3%.
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