After a banner year for US stocks that saw the Dow Jones Industrial Average hitting repeated records, equity strategists predicted that next year would see more moderate gains and increased volatility as markets retreated in the final session of this year on Friday.
A late sell-off pushed the market into the red amid declines in Apple Inc, Amazon.com Inc and several other high-flyers, but the decline did not put much of a dent in a year of records and soaring valuations.
Analysts expect many of the positive conditions that boosted equities this year to persist next year, including robust earnings growth thanks in part to the tax cut signed into law by US President Donald Trump and solid conditions in many overseas economies.
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However, on the downside, they see little chance of a repeat of the extraordinarily low volatility seen this year, which led to exceptionally few pullbacks in US stocks.
“2018 should be a good year, but not a great year and it might require a little intestinal fortitude,” CFRA research chief investment strategist Sam Stovall said. “We will get more volatility for less return.”
“We see more modest returns in 2018, because it’s already priced in. Investors will want to prepare for greater volatility,” John Hancock Investments market strategist Matthew Miskin said.
The Dow Jones Industrial Average jumped 25 percent in the year, ending Friday’s session at 24,719.22 after scoring 71 new records, the most since the index’s creation in 1896.
The S&P 500 rose 19.4 percent to close the year at 2,673.61, while the tech-rich NASDAQ surged 28.2 percent to 6,903.39, after briefly crossing 7,000 for the first time earlier this month.
Other leading bourses also enjoyed robust gains, including in Europe and especially Asia, where Hong Kong jumped more than one-third and Tokyo pushed nearly 20 percent higher, propelled by strengthening economic conditions in Asia and positive momentum from US markets.
Wall Street’s performance marks the latest sign of gathering strength in the world’s biggest economy after the 2008 financial crisis pushed the nation into the “Great Recession.”
US unemployment hit a 17-year low last month, and other key data points on retail sales and GDP have also improved.
The “bull market” — defined as the period in which stocks have avoided a 20 percent drop — has now lasted 106 months. That is the second longest in history, and Trump’s tax cut has indeed lifted optimism about corporate earnings, prompting many analysts to boost their forecasts for business profits and US growth.
Wells Fargo Advisors this week predicted the tax bill could extend the US’ economic growth cycle “by a couple of years more,” propelling some sectors, such as industrials.
Concerns include a possible hastening of US Federal Reserve interest rate increases if inflation, which has been modest, accelerates amid higher growth in the wake of the tax cuts.
“Inflation is kind of the one lingering doubt out there,” said Shawn Cruz, senior specialist in trading at TD Ameritrade, who expects comment from US Fed chair nominee Jerome Powell and other new additions to the policysetting US Federal Open Market Committee to be scrutinized closely by markets.
Other worries cited by analysts include a worsening of economic conditions in China and North Korean nuclear aggression. Concerns about a trade war have moderated somewhat compared with Trump’s initial emergence and harsh talk of “America first” policy.
However, analysts said negotiations to recraft the North American Free Trade Agreement and ongoing frictions between Beijing and Washington must be monitored.
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