2018 MIDYEAR STOCK MARKET OUTLOOK SECOND HALF RALLY?
John Lynch Chief Investment Strategist, LPL Financial | Jeffrey Buchbinder, CFA Equity Strategist, LPL Financial
The current environment looks favorable for strong earnings and stock gains. We do expect volatility, but steady economic growth provides a strong backdrop and the potential for opportunity. The first half of 2018 saw the return of equity volatility after the docile trading patterns of 2017. The surge in bond yields after the January jobs report, along with the initial trade concerns in late March, resulted in the first market corrections (a pullback of at least 10.0%) since the Brexit vote in June 2016. Though higher bond yields caused market disruptions, rising market interest rates (especially from relatively low levels) have typically been associated with an improving economy and higher stock prices. As a result, when viewing market volatility in the context of steady economic growth, it is not something to fear, in our opinion, but to embrace, as temporary market selloffs may provide suitable investors with opportunities to rebalance portfolios toward long-term targets. Given that the Fed is well on its way to unwinding accommodative measures, we encourage investors to focus on the fiscal tailwinds of favorable taxes, regulation, and government spending, while identifying companies that are willing and able to take advantage of these developments.
MIDTERM ELECTIONS: THE NEXT MARKET CHALLENGE?
Throughout the increased volatility in the first half of the year, we’ve emphasized to investors that “bottoming is a process.” In other words, when the market does experience a correction, even as the catalysts for that decline dissipate, the recoveries can still take several months. We saw this in 2011 and 2015, and this...