Next year looks set to be a good one for U.S. stocks, which are expected to plow far ahead of those in other key regions in the world, analysts say.
The forecast for the U.S. economy, which is by far the largest in the world, is solid with GDP growth expected to average 2.5 percent over 2018, according to a recent report from Goldman Sachs. If the projection comes true it will be double the 1.2 percent rate reached during 2016’s second quarter, according to data from the St. Louis Federal Reserve.
That acceleration is good because faster growth typically means higher earnings. Increased profits usually go hand-in-hand with higher stock prices over long periods.
[See: 7 of the Best Tech Stocks to Buy For 2018.]
Meanwhile, the fragile banking system in southern Europe will likely slow economies in Italy, Spain, France, Portugal and Greece. It’s unlikely that the European Central Bank will be able to increase short-term interest rates, while the U.S. Federal Reserve is expected to raise interest rates several times throughout 2018. The result of the diverging central bank policies will be a stronger U.S. dollar and a weaker euro.
For that reason, it makes sense to favor U.S. stocks over European ones because much of the gains in non-U.S. stocks are often the result of changes in the relative values of the currencies.
“The global macro landscape should be littered with slowdowns and volatility,” says Keith R. McCullough, CEO of Hedgeye Risk Management in Stamford, Connecticut.
And while China has enjoyed strong growth in recent years, McCullough says industrial demand there is expected to start slowing, and the efforts that Beijing made in 2016 to revitalize its struggling economy will likely have peaked this year. That means that the industrial side of Chinese economy, which includes steel making and construction-related work, will likely slow down.
The most straightforward strategy for small investors would be to buy the SPDR S&P 500 exchange-traded fund (ticker: SPY), which tracks the Standard & Poor’s 500 index. It has annual expenses of 0.1 percent, or $10 per $10,000 invested.
[See: 10 Ways to Play in the Asia-Pacific Stocks Pool.]
At the same time, it would be advisable to sell some holdings of European stocks, such as those held in the iShares Europe ETF ( IEV) which tracks a basket of European stocks, and has annual expenses of 0.6 percent. Likewise, trim some holdings of Chinese shares such as those held in the SPDR S&P China ETF ( GXC), which tracks Chinese stocks and has expenses of 0.59 percent.
Despite constant warnings that the U.S. market is cruising for a bruising, there are still some gems around, says Eddy Elfenbein, who writes the Crossing Wall Street blog and runs the AdvisorShares Focused Equity ETF ( CWS).
Signature Bank’s ( SBNY) loan delinquency rate tends to be much lower than the industry average but recently it got burned on loans secured by taxi medallions, Elfenbein says. The taxi industry has been hurt by the disruption caused by ride-sharing service Uber that deflated the value of medallions. For that reason, the stock has been hit hard even though the bank has been working to get the loans off the books. When the bad loans are dealt with expect the stock to rally again.
Ross Stores ( ROST) is appealing to Elfenbein because it has proven to be one of the retailers immune to the dominance of Amazon.com ( AMZN). “Ross [recently] delivered another solid earnings,” he says. “It topped the upper end of its own forecast by 5 cents per share.” If that forecast-beating performance keeps up, expect ROST stock to go higher.
If you want to stay invested in China but still want to avoid its old economy, then try Alibaba Group Holding ( BABA) says Terry Gardner, senior managing director at CJ Lawrence in New York. Alibaba has recently been named one of the seven best stocks to buy in 2018 by U.S. News.
[Read: Alibaba Is the Amazon.com of China.]
BABA is a “quintessential Chinese consumer company, ” and the “incumbent leader in the fastest-growing consumer economy is the world,” Gardner says, pointing out that Alibaba has sales growth of 40 to 50 percent year-over-year and its earnings have been growing at 35 to 45 percent annually.
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Why U.S. Stocks Will Beat Europe and China in 2018 originally appeared on usnews.com
