Room to Run — Remaining Cautiously Optimistic

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Economic and Market Predictions

The global economy is a key driver of market performance. In our view, the global economy has the necessary momentum to continue expanding in 2018. And, we believe the rate of growth will accelerate over the next 12 months. In addition, we see strength in business activity remaining supportive of risk asset pricing, although the duration of the continued rally is subject to debate.

Still Young at Heart

We anticipate that the lengthy U.S. economic expansion will enjoy faster, broader growth in 2018 than in recent years. Driven by a combination of accelerating business investment and increasing personal consumption, and further boosted by tax cuts and deregulation, gross domestic product (GDP) should pick up in pace. That being said, risks to investors are mounting, as resource utilization becomes an issue.

GDP Growth to Be Driven by Business Investment, Personal Consumption, Tax Cuts, and Deregulation

Source: Bloomberg, 11/30/17. Based on a survey of economists.

Play It Again, Uncle Sam—Another Up Year for Stocks

We expect a vibrant economy to drive consumer consumption, while productivity gains enable businesses to maintain healthy profit margins, despite rising debt service costs and higher labor input costs. Furthermore, with tax reform providing an additional boost, this could be a solid year for corporate earnings. Although already elevated, price multiples may expand somewhat further, as investor exuberance gathers momentum. The combination of fast-growing earnings and higher valuations could translate into another year of double-digit returns for stocks.

The Grass Really Is Greener on the Other Side

While the U.S. economy is in the later stages of its economic cycle, Europe, Japan, and most emerging markets remain in earlier stages—providing a significantly longer runway for growth. With more accommodative central banks and less heavily utilized resources, cost pressures are lower for these markets. Also, with less frothy valuations, many international equity markets offer more compelling valuations than their U.S. counterparts. All told, we expect non-U.S. equities to be the performance leaders in 2018.

Forward Price-to-Earnings Are Significantly Below the Long-Term Average—Leaving Room to Grow

Sources: Thomson Reuters Datastream and New York Life Investments, 11/30/17. Past performance is not a guarantee of future results. An investment cannot be made directly into an index. Index definitions can be found at the end of this piece.

Fixed Income Takes a Back Seat

We anticipate upward pressure on Treasury yields, driven by slowly climbing wages, fluctuating commodity costs, a continued widening deficit, more rapid balance sheet runoff from the Federal Reserve, and a series of interest rate hikes. Limiting their rise will be heavy buying from liability-driven institutional investors and ongoing quantitative easing among non-U.S. central banks. Investment-grade bonds have delivered annual returns of about 2% over the last five years, which we believe is at the high end of what to anticipate in 2018.1

High-yield bond investors are unlikely to fare much better. Even though credit spreads are tight and default rates are low, both may move in the opposite direction, as heavy use of leverage, rising Treasury yields, and ongoing business disruption from technological advances put pressure on more indebted issuers. Since we expect returns to be in the low single digits, we don’t see justification in the downside risk they represent. However, considering a low-volatility high-yield option may be prudent.

Tight Spreads and Low Defaults in the High-Yield Market Can Lead to Low Single-Digit Returns

(High-Yield Spread and Default Rate; Weighted Average: 12-Month Trailing)

Sources: Thomson Reuters Datastream and New York Life Investments, 11/30/17.

Commodities: The Beat Remains the Same

Shifting supply/demand dynamics and falling inventories saw prices for many commodities rise in 2017. We believe that trend is likely to continue in 2018, as supply becomes increasingly constrained. Therefore, stock prices for commodity producers have not kept pace with the gains in the underlying commodity, but we believe that’s likely to change. As confidence around the sustainability of this rebound continues to grow, we believe commodity stocks will rally—especially within U.S. energy.

Shifting Dynamics in Oil Supply and Demand Are Expected to Continue into 2018

Sources: Thomson Reuters Datastream and New York Life Investments, 11/30/17.

1. Source: Bloomberg, 11/30/17.

2. Sources: Thomson Reuters Datastream, New York Life Investments, 11/30/17.

3. Sources: Thomson Reuters Datastream, New York Life Investments, 11/30/17. The S&P GSCI (formerly the Goldman Sachs Commodity Index) serves as a benchmark for investment in the commodity markets and as a measure of commodity performance over time. The Consumer Price Index (CPI) produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services. Past performance is no guarantee of future results. It is not possible to invest directly in an index.

4. Source: Morningstar, 11/30/17. U.S. Large Caps are represented by the S&P 500 Index, which is widely regarded as the standard for
measuring large-cap U.S. stock market performance. U.S. Small Caps are represented by the Russell 2000 Index, which measures the
performance of the small-cap segment of the U.S. equity universe. Past performance is no guarantee of future results. It is not possible to invest directly in an index.

The information and opinions contained herein are for general information use only. MainStay Investments does not guarantee their accuracy or
completeness, nor does MainStay Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.

Bonds. Funds that invest in bonds are subject to interest-rate risk and could lose principal value when interest rates rise. Bonds are also subject to credit risk, in which the bond issuer may fail to pay interest and principal in a timely manner.

High-yield bonds. High-yield securities (junk bonds) have speculative characteristics and present a greater risk of loss than higher-quality debt securities. These securities can also be subject to greater price volatility.

Commodities. Any negative changes in commodity markets (that may be due to changes in supply and demand for commodities, market S-4 events, regulatory developments, or other factors) could have an adverse impact on instruments and companies that are susceptible to fluctuations in certain commodity markets.

Small-cap stocks. Small-cap stocks are often more volatile than large-cap stocks. Smaller companies generally face higher risks, due to their limited product lines, resources, and financial markets.

 

Quantitative easing (QE) is an unconventional monetary policy in which a central bank purchases government securities or other securities from the market to lower interest rates and increase the money supply.

The Phillips Curve is a single-equation empirical model describing a historical inverse relationship between rates of unemployment and corresponding rates of inflation that result within an economy.

A cryptocurrency (or crypto currency) is a medium of exchange using cryptography to secure transactions and to control the creation of new units.

A blockchain is a digitized, decentralized, public ledger of all cryptocurrency transactions.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. The S&P 500 Index is widely regarded as the standard for measuring large-cap U.S. stock market performance.

For more information about MainStay Funds®, call 800-MAINSTAY (624-6782) for a prospectus or summary prospectus. Investors are asked to consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. The prospectus or summary prospectus contains this and other information about the investment company. Please read the prospectus or summary prospectus carefully before investing.

MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay
Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, NJ 07302. NYLIFE Distributors LLC is a Member FINRA/SIPC.

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SAS Group

Strategic Asset Allocation & Solutions Group, New York Life Investment Management

NYLIM’s Strategic Asset Allocation & Solutions (SAS) Group invests tactically across the full span of global capital markets, designing comprehensive solutions for a variety of client needs. Managed assets include MainStay Asset Allocation and Retirement Funds, mandates for third parties, and a customized strategy for the New York Life General Account.

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