While forecasting robust gains for the year, many readers believe the going will get bumpy in the second half.
By Christine Benz | 01-11-18 | 05:00 AM | Email Article

Morningstar.com readers are generally sanguine about stocks' prospects for 2018, predicting an average return of nearly 7% for the S&P 500 this year. But they don't expect the sailing to be smooth by any stretch.

Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz.

Those were the general takeaways from a recent market prediction discussion on Morningstar.com--now an annual tradition. Of course, the predictions are all in good fun: It's impossible to predict the market's trajectory over any time period, especially as short a time frame as a single year.

In last year's guessing game, for example, few posters predicted gains as robust as the full-year returns from the S&P 500 and Bloomberg Barclays Aggregate Index. The average reader forecast for equities was 6% for the S&P 500 (it returned more than 20% last year) and 2.3% for the Bloomberg Barclays Aggregate Index (it returned 3.6% in 2017). 

Nonetheless, the predictions, taken in aggregate, provide an interesting window into investor sentiment. And from that standpoint, most investors don't see much that could slow stocks' current momentum, at least not right now. At the same time, many posters said they expect equity-market volatility to pick up substantially later this year, citing culprits like the midterm elections and high valuations.

Meanwhile, most posters said they expect the bond market to limp along: The average prediction was for the Barclays Aggregate Index gaining about 1.5% over the next year, which would represent a lower return than the index's yield today. 

'There Aren't Big Sell Signals'
The forum included a fair share of market bulls, with tax cuts frequently cited as a catalyst for further gains. 

Poster Sunbird posited one of the most optimistic forecasts, guessing that the S&P 500 would gain 20% for the year. "I base this on low interest rates, [the] new tax bill, and inflation under control," this poster wrote.

Sugarhill6 also believes there's gas left in the tank for this equity-market rally, predicting 10%-15% equity-market gains and writing, "I think the tax cuts, the elimination of the healthcare mandate, deregulation benefits, and a stronger global economy are a few things that will put wind at the backs of corporate revenue and earnings."

Even posters who don't see the tax cuts as a universal good said they expected them to stoke further market gains. Wanttoretire wrote, "With the new tax cuts platform (which will come back and hurt us later), corporations will increase their buybacks and hopefully spending. For 2018, the Dow [will be] up 14%, Nasdaq up 17%, [and the S&P] up 11%."

Atomiccab rightly asserts that there's more career risk for professional money managers who are too bullish and call it wrong; feeling no such pressure, this poster predicts a 15% gain from the S&P 500. "The majority of professional pickers' [estimates of market returns] are closer to 5%. They don't want to look foolish. I want bragging rights."

Poster bgstuhan wasn't as optimistic about stocks' prospects, but nonetheless predicted an 8%: gain for the S&P 500 index. The reason? "You don't want to buy at these valuations, but there aren't big sell signals, either."

'The Market's Highs for the Year Will Be By/Before 7/31'
A large number of prognosticators expect stocks to start 2018 on a high note, only to peter out or even fall precipitously later on.

Monistein warned, "This is an election year, do not forget, which may rattle the market depending on the outcome."

Gaiuslives also thinks the election could spell trouble for stocks. "I suspect the market's highs for the year will be by/before 7/31," this poster noted. "Thereafter, the domestic election cycle will likely give pause to any rally, and the November results may cause everyone's 'genius stock-picking' to crater."

Win1177, while predicting a 9% return for the S&P 500 this year, thinks valuations and/or an economic slowdown could lead to a late-year market sell-off. "We are fairly late in the business cycle, and the various issues that have provided a tailwind for the stock market (low interest rates, recent deregulation, tax plan, improving global markets, etc.) have already been largely priced into the market. I think we'll eventually see a recession start sometime in 2019, and the stock market will be heading down come the fall of 2018, in anticipation of this."

Valuations concern Jeff12345: He expects an 8%-10% return for the S&P 500 for the year, but believes the gains will come all in the first half and second-half performance will be poor. "Nothing drastic, just flat for a period while people actually look at the price/earnings ratios and realize what they are paying for earnings."

Lionsgate, forecasting a 15% loss for stocks for the year, was among the most pessimistic of the prognosticators. "Stocks will gain 8%-10% before a political event brings about a panic sell-off," this poster wrote. "[Stocks will head] down 30% or more with turbulence to follow." 

Rathgar foretells a similar performance pattern, albeit one not quite as dire. “My prediction [is that the] S&P continues to do well in the first half; we then have a 15% correction sometime midyear and the market ends 2018 down 2%." 

'Bonds Will Be Flat'
Few posters expected dramatic gains or losses from bonds over the next year; most guessed that returns will fall in the 2.5%-3.5% range. However, those forecasting weak equity returns tended to suspect bonds would perform well, whereas equity bulls were less sanguine about bonds' prospects.

One of the most optimistic forecasts for bonds came from Lionsgate; this poster is expecting fixed-income assets to gain 6% amid a weak equity market. "Interest-rate increases will be put on hold to ease investors' minds. Bond funds will benefit and move steadily upward …"

Sugarhill6 is expecting that bonds will return roughly their yields.  "Negative interest rates in other parts of the world will continue to drive bond demand in the United States despite the easing of our central bank," this poster wrote.

Jhamlin isn't expecting nominal bonds to be any great shakes, but sees value in inflation-protected bonds. "Bonds will be flat and now is a good time to buy inflation-protected bonds as inflation is low for now," this poster wrote.

'Stocks Will Go Up, Unless They Go Down'
The prediction swap is meant to be a fun exercise, and several posters were quick to underscore the folly of trying to guess the market's direction.

Stagioneestate quipped, "After spending hours consulting experts and running multivariate prediction models, I conclude that stocks will go up, unless they go down. Bonds will do the same but just not as much."

Also taking the exercise lightly was Sunbird, who wrote, "Do I have confidence in these predictions? No way. Have been in the market too long to have any real faith in my or anyone else's crystal ball. But it's sure fun trying to prophesy, though the market has even more fun making fools of most investors on a regular basis."

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