Your Answers To 5 Key Questions For 2018

Our Chief Investment Office weighs in on the issues, opportunities and concerns that may matter most to the markets and your finances in the coming year.

1. Stocks Soared to New Highs in 2017, But Can the Market Rally Continue?

Mary Ann Bartels, head of Merrill Lynch Wealth Management Portfolio Strategy

"We're now in the second-longest bull market for stocks in history—and there's growing speculation it could be running out of steam. But if the earnings for companies in the S&P 500 expand in 2018, and if interest rates don't rise too much and stay near their historic lows, we think the equity market can continue to advance.

Corporate earnings have been a lot stronger than the market anticipated, and we believe they can remain strong as we move into 2018. The anticipated tax cuts only increase the likelihood that earnings will rise.

Another powerful force supporting further gains is technology. Today we're in a new digital era, and that has launched technology into a leadership position in the stock market. And what we're seeing now is very different than what happened in 2000, when tech stocks were about to fall. The excitement then was about early hints of what advances in innovation might do. Now, we feel technology's impact constantly—it's woven into our daily lives and improving how businesses operate, so technology should help the bull market continue.

We also expect other cyclical sectors, including industrials and materials, to benefit from the strength of the global economy, along with any large-scale infrastructure spending here in the U.S." 

2. Could Rising Geopolitical Tensions Roil the Markets this Year — and How Should I Respond If They Do?

Joseph Quinlan, head of Market and Thematic Strategy, Bank of America Global Wealth and Investment Management

"Geopolitical events can be disruptive to markets; and some threats, if realized, could generate significant declines in asset prices. What's important to keep in mind here is that markets historically have tended to bounce back quickly, even from major upheavals.

Looking to the coming year, we have to hope that China, which has a strong interest in maintaining stability, will not allow the situation with North Korea to deteriorate. But even without war, per se, a major cyber attack on the U.S. electric grid, for example, could leave people without access to bank accounts and unable to travel or conduct business.

Rising populism globally could also be a problem. The greatest risk here is advances by fringe political parties that undercut traditional democratic values, such as religious tolerance and belief in the rule of law. The good news is that historically, democratic societies have responded to social discontent before it posed a dire threat to their way of life.

But whatever the future might bring, it's important for investors not to overreact to any given event or crisis. You don't want to disrupt your investment strategy because of an event that might only have a short-term impact. And remember that diversification is the cornerstone of risk management and can be used to address geopolitical risk just as it can help manage other types of investment risks."

3. What Areas of the World Offer the Most Promising Opportunities For Investors?

Niladri Mukherjee, director of Portfolio Strategy for PBIG and International, Bank of America Global Wealth and Investment Management

"We believe both emerging markets and international developed markets, including Europe and Japan, should provide opportunities for investors in 2018. Economic growth in Europe has been surprisingly strong, fueled by a rise in domestic demand, an increase in bank lending, and easy monetary policy. Monetary policy is also quite loose in Japan—where unemployment is falling, as it is in Europe, and wages are finally beginning to pick up. All of that means a positive outlook for stocks in those regions.

And because equities in Europe and Japan massively underperformed U.S. stocks during the past decade, valuations in both regions are still quite favorable compared with the U.S.

Emerging-market equities have already had a great couple of years, outperforming U.S. markets. But there too, valuations on the whole remain relatively cheap. And we think emerging market economies will continue to benefit from rising global growth and a strong corporate-profits picture.

Within emerging markets, Indian equities look particularly promising. And we expect the Indian economy to grow faster than other emerging markets—and much faster than developed ones. Analysts at BofA Merrill Lynch Global Research believe that rapid growth should propel India past the United Kingdom, Germany and Japan to become the world's third-largest economy—after the U.S. and China—by 2028."¹

4. How Might Further Interest-Rate Increases by the Federal Reserve Affect My Finances?

Matthew Diczok, head of Fixed Income Strategy, Bank of America Global Wealth and Investment Management

"Right now, the U.S. economy is still chugging along and is actually getting stronger. The unemployment rate could soon be the lowest it has been in almost 20 years and inflation is expected to pick up. All of that puts pressure on the Fed to continue raising rates to fulfill its dual mandate: to keep prices stable and maintain the economy at full employment.

Yet the Fed only controls short-term interest rates. Longer-term rates are more market-driven and they generally do not rise as much as short-term rates during periods when the Fed is hiking.

But even if rates rise a full percentage point, the increase on payments for mortgages or other consumer lending should be very manageable. At the same time, you'll finally be able to earn more on bank deposits and should have the opportunity to reinvest in higher-yielding bonds. For example, you could consider building a laddered portfolio of bonds that mature in sequence over the coming years. As the older bonds come due, you can reinvest the proceeds in new bonds with higher interest rates.

On balance, higher rates aren't something to fear but rather to look forward to, especially if increases come at the measured pace we expect."

5. How Could I Put all of These Insights to Work For Me in the Coming Year?

Chris Hyzy, chief investment officer, Bank of America Global Wealth and Investment Management

"In terms of how to allocate assets, we continue to expect equities to outperform fixed income amid ongoing U.S. and global expansions, improving corporate profits, and inflation that remains subdued. Although we remain positive about U.S. equities, we also emphasize international stocks, including emerging markets, given their more attractive valuations and better earnings prospects.

Within equities, we suggest a strong, solid mix between growth and value stocks, and a particular emphasis on dividend growth stocks—that is, equities whose dividends are likely to grow rather than just those that have the highest current yields. Dividend growth is our number-one theme for long-term investors.

For fixed income, we prefer high-quality, investment-grade corporate bonds over Treasuries—although a small allocation to Treasuries, which offer liquidity and relative safety, is still advisable.