The Dow advanced 2.3 percent in the first five days of the year.  Historically, that’s a good sign.  When the Dow is up during the first week, the market continues to advance for the rest of the year about 80 percent of the time.  What are our 2018 expectations?  Read on.

In 2016 value stocks outperformed growth.  In 2017 and the first week of 2018 growth was better (especially the “FANG” stocks).  I expect the pendulum will switch back to value.  We’ve started to see the first signs of that already with a rise in telecoms, industrials, financials, and health care.  Value does best in during periods of uncertainty (2000-02 and 2008-09).  Maybe this is a call on volatility as well. 

I expect a stronger economy, aided by a super business-friendly environment and strong international demand.  GDP will reach 3 percent, which means more pressure on the Fed to raise rates.  My prediction:  the Fed’s action will frustrate President Trump and incoming Fed Chairman Jerome Powell will feel the heat.  It’s very important for the Fed to remain independent, though.

The economic backdrop and earnings outlook continue to support a strong equity market and I expect this year to be a good one with returns of at least 7-10 percent. The tax bill will help, especially on the business side, and we're seeing signs now as companies say they'll increase capital spending, repatriate many billions of dollars held overseas and give bonuses or salary boosts.

Of course one should always ask, “What could go wrong?”  There are two reasons one should expect lower returns and more volatility.  The first is that optimism is high.  Many of those who were bearish a few years ago are turning bullish.  Expectations are high.

Second, if interest rates rise a lot then it will end the TINA (there is no alternative) environment.  So far bond investors are not discouraged by the improving data and outlook or by last month's rate increase.  They believe inflation will not be a problem.  They are right.  That said, the tax cuts will boost GDP, which was set to be humming anyway.  So the Fed might raise rates faster than investors expect and at some point that will be a problem for bond holders.  We'll see.

For more than a year the S&P 500 hasn’t even retreated three percent, but it will in 2018.  Normal volatility will return.  That’s fine.  The bull market will continue for another year.  Stick with stocks.