2018 Outlook

Moving Ahead in an Aging Recovery

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2018 Forecasts

Wells Fargo Investment Institute is expecting moderate appreciation of the dollar, improving gross domestic product (GDP) growth, and inflation moving above the Federal Reserve’s 2% target.


U.S. GDP Growth


U.S. Inflation (CPI)


S&P 500 Index


Federal Funds Rate


10-Year U.S. Treasury Yield


West Texas Intermediate Crude Oil per Barrel

Investment and Insurance Products: NOT FDIC InsuredNO Bank GuaranteeMAY Lose Value

We encourage our clients to stay engaged with their investment plans so that market optimism does not turn into complacency.

Three top questions from investors for 2018

In this video, Darrell Cronk, President of Wells Fargo Investment Institute, answers the three top questions from investors as we head into 2018.

View transcript

Five Moves That Could Make a Difference

These actions may help make a difference in investors’ portfolios in 2018.

Economic and Investment Outlook

As we head into 2018, the U.S. market’s steady upward trajectory may flatten, but we believe opportunities still exist — a flat year doesn’t mean the end of the bull market.

Expansion is maturing, not overheating

So far, data indicate that the U.S. economic expansion that began in 2009 is likely to continue into 2018. In our view, the economy shows no near-term signs of overheating, in part because the credit picture remains favorable. At this point, a repeat of the global financial crisis of 2008 seems unlikely.

Additional insights

  • The U.S. dollar may deliver mixed results. Another year of potentially slow growth and low inflation may mean the U.S. dollar performs stronger against the yen but modestly weaker against the euro and emerging markets currencies.
  • Investors should avoid both exuberance and complacency. The slow-but-steady economic recovery may be encouraging some complacency that the economic expansion could run indefinitely. When markets become complacent, investors should weigh risk and reward even more carefully.

U.S. household debt service

Credit card and auto debt have hit new records, but mortgage debt accounts for 70% of household liabilities and remains below its 2007 peak. Most importantly, low interest rates and rising wealth and wages put the ratio of debt payments to total income below its 2008 peak.

Sources: Federal Reserve Board, Bank for International Settlements, and Wells Fargo Investment Institute, October 5, 2017

Shaded area represents time frame of a U.S. economic recession. Disposable income is
defined as income after taxes.

Performance of the small-cap Russell 2000® Index and mega-cap S&P 100 Index relative to the S&P 500 Index

Small-cap stocks have tended to underperform in the latter half of bull markets. Mega-cap stocks have tended to outperform in the last phase of a bull market. Recent small-cap and mega-cap performance suggests that the bull market still has room to run.

Source: Bloomberg and Wells Fargo Investment Institute, November 13, 2017

Past performance is no guarantee of future results. An index is unmanaged and not available for direct investment. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index. The S&P 100 Index is a subset of the S&P 500 Index and measures the performance of 100 major blue-chip companies across multiple industry groups. The S&P 500 Index is considered representative of the U.S. stock market.

Slower growth — but still growing

The equity bull market is maturing but has room to run. We anticipate continued revenue and earnings growth for S&P 500 Index companies in 2018, with revenues expected to increase at a 6.4% pace, versus 5.9% in 2017, and earnings per share expected to grow 12.4%, versus 10% in 2017 (or $145 versus $129), fueled by tax reductions and higher operating margins. We do not expect the bull market to end in 2018.

Additional insights

  • International stocks may offer more growth potential. International equities are earlier in their cycle and could outperform U.S. equities.
  • Selectivity may become more important. Cyclically dependent (versus defensive) companies should continue to benefit from global growth.

Supportive conditions, but caution is in order

In our opinion, investors should use current yield levels as a proxy for expected 2018 fixed-income returns. However, as we head into 2018, investors need to take into account potential late-cycle risks and be thoughtful regarding fixed-income portfolio positioning.

Additional insights

  • Favor investment-grade-rated debt. We recommend that investors upgrade their fixed-income credit profiles.
  • Consider Treasury Inflation-Protected Securities (TIPS). Investors should consider allocating a small portion of their portfolios to TIPS to help mitigate an unexpected increase in inflation expectations.
  • Intermediate-term fixed income should continue to perform. We believe intermediate-term fixed income should continue to provide investors with modest returns coupled with limited downside volatility.

Difference between 10-year and 2-year U.S. Treasury yields

Short-term rates often move above longer-term rates before a recession. We forecast that short-term rates will remain below long-term rates at the end of 2018, consistent with our belief that the economic expansion is likely to continue.

Sources: Bloomberg and Wells Fargo Investment Institute; November 7, 2017

The shaded area represents a time frame of a U.S. economic recession. Yields represent past performance. Past performance is no guarantee of future results. Current yields may by higher or lower than that quoted above. Yields fluctuate as market conditions change. One basis point is equal to 1/100 of 1%; 1% equals 100 basis points.

Equity REITs trading at a discount to net asset value (NAV)

Real Estate Investment Trusts (REITs) now trade at a 4.8% discount to their underlying real estate holdings, as compared with the 2.5% average premium they’ve traded at since 1990. The typical premium makes sense because REITs offer advantages that include professional management and access to capital, making a discount compelling.

Source: Green Street Advisors and Wells Fargo Investment Institute; monthly data from February 1, 1990, through September 1, 2017. For illustrative purposes only.

All REITs premium to NAV is a weighted average (weighted by NAV shares outstanding) of all U.S.-listed companies in Green Street’s coverage universe, excluding hotels and those without a published opinion. Green Street’s coverage universe includes 128 REITs and other publicly traded real estate companies, including 83 companies in North America and 45 in Europe. NAV is the REIT equivalent of book value and represents the estimated market value of a company’s property assets less any liabilities. Past performance is no guarantee of future results.

Still in a bear market

The pesky commodity bear supercycle continues. However, we expect the average REIT to deliver mid- to high-single-digit gains, in large part because REITs today offer decent fundamentals at a good value. We expect a similar picture will prevail in 2018 but that investors will increasingly focus on value.

Additional insights

  • Commodities: down or sideways. We expect downside action in oil and gold to begin in 2018 and sideways price action for most commodities.
  • Consider the pros and cons of Master Limited Partnerships (MLPs). MLPs generally should track oil prices, which we expect to be flat to down. However, we believe MLP performance should be respectable because of generous dividend yields.

Focus on active management

Recent hedge fund performance has tended to support our thesis that a regime change was underway for alternative investments and that hedge fund performance would improve. This also supports our forecast that, as the era of quantitative monetary stimulus began to wane, the environment would become more favorable for active management.

Additional insights

  • There are strategies worth considering. Dispersion strategies such as long/short equity and credit should perform best, followed by event driven strategies focused on special situations and stressed/distressed credit.
  • The illiquidity premium is likely to increase. Offered by private capital strategies, especially private credit, the premium is likely to increase in 2018 as lending conditions tighten and credit markets weaken.

Hedge fund returns have improved over the past 12 months

Hedge fund returns for the 12 months ended October 2017 showed a significant improvement compared with the average rolling 12-month returns over the past eight years.

Sources: Bloomberg and Wells Fargo Investment Institute; monthly data from October 1, 2008, through October 31, 2017

Past performance is not guarantee of future results. The performance shown is for illustrative and informational purposes only and does not predict or depict the performance of any investment or the likelihood of achieving any return on an investment. The asset classes shown may not perform in a similar manner in the future. An index is unmanaged and not available for direct investment. Index returns do not reflect any deduction for fees, expenses, or taxes applicable to an actual investment. Unlike most asset-class indices, HFRI index returns reflect fees and expenses. Please see the end of this report for the risks associated with the representative asset classes and definitions of the indices.

The HFRI Indices are based on information self-reported by hedge fund managers that decide, on their own, at any time, whether or not they want to provide, or continue to provide, information to HFR Asset Management, LLC. Results for funds that go out of business are included in the index until the date that they cease operations. Therefore, these indices may not be complete or accurate representations of the hedge fund universe and may be biased in several ways.

2018 Focus Themes

What to watch for in 2018 and beyond.

Investment Expertise and Advice to Help Clients Succeed Financially

Wells Fargo Investment Institute is home to more than 100 investment professionals focused on investment strategy, asset allocation, portfolio management, manager reviews, and alternative investments. For additional investment insights and timely market commentary, visit our website.

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