At a top level, the US economy continues to perform well. Gross Domestic Product (GDP) growth is likely to come in at around 3% in Q4, with both the unemployment and inflation rates running at historically subdued levels of 4.1% and 2.2% (CPI) respectively. Many economists remain puzzled by the stubbornly low inflation rate, which hasn't ticked above 3% since 2012, despite the low (and falling) unemployment rate.
The upshot of this economic dilemma is that US corporations have been able to book record sales without a corresponding rise in raw material or employee costs. If this trend carries over into 2018, it could be another strong year for US stock indices. From a policy perspective, the picture is a bit more mixed. Republicans on Capitol Hill appear likely to pass a large tax reform bill headlined by an across-the-board cut to the corporate tax rate.
While the long-term merits of this bill can be debated, it's likely to lead to a short-term boost to economic growth and corporate profits. Meanwhile, the Federal Reserve has raised interest rates a total of five times from the Great Financial Crisis lows, in addition to ending its Quantitative Easing (QE) program and even starting to sell off some of its accumulated assets.
Continued "normalization" of monetary policy could provide a small headwind for US stocks in the coming year, though the central bank is unlikely to do anything that endangers the health of the longer-term bullish trend. In sum, the US economy could see a modest acceleration in economic activity in 2018. Continued economic strength should support US stock values, though we're unlikely to see another 20% rally in the broad indices. The primary risk to our forecast would be an uptick in inflation prompting the Fed to raise interest rates aggressively in the coming year.
Like the US, the Euro area economy expanded in 2017, but the region's economic figures remained uniformly behind those of the US. The last quarterly GDP reading from the Eurozone showed a decent 2.6% annualized growth rate, and crucially, economic growth in the Eurozone has accelerated in each of the four quarters.
That said, the Euro area's unemployment rate remains elevated at 8.8% and inflation has spent most of the year hovering around 1.5% after a brief tick higher at the start of the year. Looking ahead, the IMF is relatively cautious on the region, predicting "only" 1.9% growth in the coming year, with relatively strong growth in Germany (1.9% growth expected in 2018)and Spain (3.2%) offset by a more subdued expansion in Italy (0.9%) and France (1.2%).
Despite the slower forecast for economic growth, it's worth noting that European stocks are trading at a discount compared to their US rivals, so another decent year for euro area equities could still be in the cards. Compared to its US rival, the European Central Bank is in an extremely accommodative posture, with interest rates at rock bottom levels and a QE program scheduled to last through at least September. This monetary policy tailwind means the "path of least resistance" for European stocks remains to the topside. Of course, disruptions related to the ongoing Brexit negotiations could throw a wrench in our outlook for both the Eurozone as a whole and the UK in particular
When considering the at times contentious negotiations over Brexit and extreme uncertainty surrounding the whole affair, the relative underperformance of the UK's FTSE index this year is not particularly surprising. Unfortunately, that storm cloud could continue to hang over the country's economy in 2018 as well.
The UK economy clocked in at a 1.5% annualized growth rate in the most recent quarter, down significantly from the 2-3% growth the country was experiencing before the Brexit vote. That said, UK citizens have seen the unemployment rate grind lower throughout the year, with the current 4.3% rate actually representing the lowest reading since the mid-1970s. Meanwhile, inflation is running a bit hotter than in other major economies at 3.1%, which limits the Bank of England's ability to cut interest rates to try to stimulate the economy.
In sum, the UK's economic and market performance will hinge heavily on the progress in the ongoing Brexit negotiations. If the two sides are able to come to mutually beneficial agreements on sticky issues like trade, immigration, and regulation, it would provide a boost for the FTSE and the UK economy as a whole.
Japan's economy is generally growing in-line with its developed market peers, with the most recent GDP report showing 2.1% growth, but the country continues to struggle in its battle with deflation.
Despite the unemployment rate holding steady at a 23-year low at 2.8% as of writing, Japan's annualized price growth was just 0.2% in the last quarter. The Bank of Japan has done all it can, with an ongoing QE program and its benchmark interest rate locked at -0.10%.
That said, BOJ Governor Kuroda has dropped some subtle hints that the central bank may start to look at winding down its crisis-mode stimulus program. When it comes to Japanese markets, the Nikkei 225 index should continue to see the same tailwinds of a weak yen and supportive central bank that have driven the index consistently higher over the last 18 months.