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Market Outlook: 4th Quarter

By Kate Warne October 18, 2017

The stock market has been rising steadily and calmly this year, as investors stayed focused on good news from company profits, improving global economic growth and still-low interest rates. How might 2017 end? And what can we expect when we turn the page to 2018?

Investment Strategist Kate Warne talks about the current state of the markets and what to expect going forward.

Economic outlook – Short-term, the impact of the hurricanes is likely to muddy many economic indicators and reduce the economy’s growth rate. But rebuilding and several other signs suggest better economic growth ahead, including strong surveys of manufacturing and service sector activity. Despite September’s weak report, job growth still looks solid, supporting continued consumer spending. And investors have become more optimistic about the possibility of tax cuts, which could improve the outlook for 2018. Overall, Edward Jones thinks the economy is growing by 2% to 2.5%, a little faster than the average during this expansion, and that’s positive news for investors.

The current bull market – This bull market in U.S. stocks started more than eight years ago and is still showing signs of strength, not weakness. International stocks have outperformed U.S. stocks this year and are also near record highs, indicating that gains are broadly based. But make sure your expectations are realistic – lower returns and more volatility are likely to lie ahead. Record high stock prices meant S&P 500 returns have been about 14% per year for the past five years. That’s twice what Edward Jones thinks they’ll average long-term. The gains in stock prices have been based on stronger fundamentals of economic and earnings growth, which we think will continue, supporting higher stock prices over time. But valuations are above average. That doesn’t mean the end of the bull market or frequent pullbacks, but it does suggest investors should expect lower returns in the future. When the price-to-earnings ratio for the S&P 500 has been high in the past, it’s been followed by lower returns.

Rising interest rates – Edward Jones expects the Fed to continue to raise short-term rates slowly and patiently as long as inflation stays around 2%. And even with the drop in the unemployment rate to 4.2%, the outlook for inflation is still low because wage growth remains sluggish. That means long-term interest rates are also likely to continue increasing slowly, keeping bonds attractive. Despite a bit more uncertainty about the outlook for interest rates as the Fed starts shrinking the size of its balance sheet and new Fed governors are appointed, we think bonds will continue to play an important role in stabilizing portfolio values.

International outlook – International equity investments have benefited from the synchronized rebound in global economic growth, which has been stronger than expected. In addition, the value of the dollar has declined, improving the returns on international investments as well as U.S. company profits. Edward Jones thinks broad-based international equity investments should continue to outperform as global conditions improve. Their valuations are more attractive than U.S. stocks, and their earnings are expected to grow faster. Consider adding international equity investments if appropriate for your situation.

Action for investors – Make sure you have a realistic outlook. Edward Jones thinks the markets won’t stay calm forever, and as they return to normal ups and downs, bigger moves may seem surprising. Remember that any pullbacks can offer opportunities to buy at lower prices. In addition, we think it’s prudent to prepare for lower returns over time by making some adjustments today. You may need to rebalance so your portfolio has the right mix of stocks and bonds based on your comfort with risk and your long-term financial goals. In addition, you may need to improve your portfolio’s diversification by adding a wider variety of asset classes, including small- and mid-cap stocks as well as international equity investments.

Important Information:

This information is for educational and illustrative purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation.

Investing in equities involves risks. The value of your shares will fluctuate, and you may lose principal. Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.

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