Market Outlook 2018 – Janus Henderson

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Market Outlook 2018 – Janus Henderson

Market Outlook 2018 – Janus Henderson


Can the Bull Market Continue?

 An aging bull market and a 10-year economic expansion have us, like many investors, wondering: How much longer can this rally continue? But signals from our Adaptive Multi-Asset Solutions team’s proprietary options pricing model suggest a correction is not imminent.
Global stocks have enjoyed a good run, roughly tripling since the financial crisis. Options prices, which indicate the market’s assessment of short-term risk, signal limited upside, but do not forecast a looming downturn. On the contrary, the equity market appears fairly priced given a number of positive factors that could propel the current business cycle, including potential U.S. tax reform, continued quantitative easing in Europe and Japan, and an upward trajectory in global growth. Inflation also remains subdued, thanks to new technologies that improve efficiencies and keep prices in check.

The options market does not believe that the equity market has to self-correct just because we’re a decade into the expansion, while the average business cycle lasts six years. We’re in the camp that this expansion can continue.”

– Ashwin Alankar, Ph.D.

Head of Global Asset Allocation & Risk Management

In other words, barring unforeseen economic or political shocks, the global economic barometer is set to fair. We argue that some of this benign outlook is due to the options market’s expectation of an orderly unwinding of the ultra-accommodative monetary policies in the U.S. and Europe in the next few years.

The Federal Reserve is expected to continue raising interest rates gradually in 2018 and beyond, while slowly reducing its $4.5 trillion balance sheet. The European Central Bank, which has yet to begin tightening, is focusing on tapering asset purchases first and will likely raise rates at a later date. This staggered approach could help global markets avoid a sudden liquidity crunch that would curtail growth, create a headwind for equities and cause global bond yields to spike – more reason to believe the current expansion can persist.

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