Big Market Predictions For 2018

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.

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.

Bitcoin Bubble To Get Bigger As First ETF Launches

Let's call a spade a spade. Bitcoin, and cryptocurrencies more generally, are in a bubble. You don't see price increases of thousands of a percent in a year and daily fluctuations of 30% or more in assets that are priced reasonably.

For sure, cryptocurrencies and the blockchain technology that underpins them are revolutionary. There may even be a bright future for some of the cryptocurrencies that exist today, including the most famous of them all, bitcoin.

However, that doesn't change the fact that the mania that surrounds the space today has turned this emerging asset class into nothing more than a playground for speculators. The vast majority of people that hold cryptocurrencies today are doing so because they expect the price to rise, not to use them in transactions.

Bitcoin Price

Even bitcoin, which has been hailed as "digital gold" by its proponents is untested as a store of value, unlike the yellow metal which has thousands of years of history behind it. 

Gold Advances

I'm not a gold bug. I've never owned the yellow metal and I probably never will. But there are countless people who do, and believe it's a safe haven. In fact, the amount of gold held by ETF investors is at the highest levels in nearly five years―71.5 million troy ounces, according to Bloomberg.

Gold ETF Holdings

Source: Bloomberg

The price of the metal rallied in 2017 by more than 13.7%, on top of the previous year's 8.6% gain, despite the broadest global economic expansion in a decade, low inflation, record-low stock market volatility—all supposed fundamental head winds for gold, and competition from bitcoin.

Nothing seems to faze gold anymore, and from the looks of it, there's been a slow and steady accumulation of the metal by investors hedging against the next market shock. That shock might not come in 2018, but when it does, it wouldn't be surprising to see gold spike significantly higher, especially if bond yields tumble, as they typically do during times of market stress.

But even if that shock doesn't come next year, the yellow metal should see another solid showing. Flat to higher for the yellow metal is a reasonable assumption for gold in 2018.

Pace Of ETF Inflows Slows

Any list of predictions for 2018 on ETF.com wouldn't be complete without at least a few guesses about what will happen in the world of exchange-traded funds. The first one I'll put out there is that total annual inflows for 2018 are likely to slow from their breakneck pace of 2017.

As of this writing, we were currently tracking to about $475 billion worth of inflows for 2017, 65% more than the previous annual record from 2016 of $287.5 billion.

One of the most tranquil periods for financial markets in history and the introduction of the fiduciary rule were the catalysts for 2017's stunning acceleration in ETF inflows. But if volatility comes back into the market this year—as I suspect it will—investors may not be so apt to plow money into the market indiscriminately, which may dampen flows a bit.

I still expect a strong year―the shift from active to passive ensures ETFs will continue to eat the lunch of mutual funds. Annual inflows of $382 billion for 2018 is my wild guess, which is simply the average of the inflows seen in 2016 and 2017.

3 More ETFs Join The $100 Billion Club

Up until 2017, only one ETF had ever had assets under management (AUM) north of $100 billion. The SPDR S&P 500 ETF Trust (SPY) has been comfortably above that level for years. In 2017, the rival iShares Core S&P 500 ETF (IVV) eclipsed that impressive level thanks to the stock market's ascent and inflows of $30 billion. AUM for the fund currently stands at $142 billion.

In 2018, I expect at least three more ETFs to join the $100 billion+ club: the Vanguard Total Stock Market ETF (VTI), with current assets of $92 billion; the Vanguard S&P 500 ETF (VOO), with AUM of $84 billion; and the iShares MSCI EAFE ETF (EFA), with AUM of $84 billion.

This isn't a bold prediction, just extrapolation. If these three ETFs have modest inflows and see a bit of price appreciation, they can easily eclipse the $100 billion milestone.

Sumit Roy can be reached at [email protected]