There probably won't ever be another year quite like 2017. From record-low market volatility to the emergence of a potential new asset class—cryptocurrencies—many of the things that happened during 2017 are unlikely to be repeated in 2018, or anytime in the foreseeable future, for that matter.
Call that prediction No. 1―2018 is going to be nothing like 2017. I could be completely off the mark on that, just as I could be completely off the mark on the next six predictions I'll be making in this article. That's the nature of financial market predictions: You can never be certain about anything.
But it's still a fun exercise to try and predict the future. So without further ado, here are my six market predictions for 2018:
There Will Be A Stock Market Correction
I'm not really going out on a limb with this one, am I? Stock market corrections are about as unusual as a winter storm in Chicago. They happen almost every year. The exception is 2017, when the stock market managed to avoid even the most modest of pullbacks (Chicago wasn't so lucky; it got hit by a storm on Christmas Eve).
The largest peak-to-trough decline for the S&P 500 last year was 2.8% (3.3% if you measure intraday values)—the shallowest drop for any calendar year on record, according to Bloomberg. The index also didn't register a monthly loss (when including dividends) in any month during the year—the first time that's ever happened.
It goes without saying: Don't expect those extraordinarily low levels of volatility to continue. In a typical year, the stock market experiences at least one or two declines of 5% or more. Even a 10% correction isn't that rare. There's been at least one decline of that magnitude (measured on an intraday basis) in every year since the bull market began in 2009, with the exception of 2013 and 2017.
If things revert to the mean in 2018, expect one or two stock market drops that shake investors out of their complacency.
|Year||Largest Correction (%)|
Source: ETF.com .Data measures correction from peak-to-trough, including intraday values. *Correction took place between the end of 2015 and early 2016. Drop was even larger (14-15%) when measured from late-2015 values.
Bond Yields Will Rise Or The Yield Curve Will Invert
Analysts have been predicting it in almost every year since the financial crisis―the rise of long-term bond yields. But each year they've been off the mark, with 2017 being no exception. Despite three Fed rate hikes last year (and four in the past 13 months), the U.S. 10-year Treasury yield actually declined, inching down from 2.44% at the start of 2017 to 2.41% on Dec. 29.
In 2018, that won't happen―not unless the yield curve inverts (which it very well might). It's simple math. If the Fed hikes rates another 0.75% in 2018 as it's currently projected to do, the two-year Treasury yield, which tracks the federal funds rate closely, would likely jump to 2.6% or more.
Either the 10-year yield would have to also climb, or there would be a 10-year/two-year yield curve inversion. Investors fear an inverted yield curve, because one has preceded every recession of the past 40 years, according to the St. Louis Fed.
Source: St. Louis Fed
All this means investors can't expect the same ho-hum bond market they've grown accustomed to. Fixed income might finally start to get interesting in 2018.