David Kelly speaking at a Morningstar conference.

There are multiple economic and financial numbers investors can monitor in 2018 to get a sense of the market environment. David Kelly, chief global strategist for JPMorgan Funds, offers his own list of the top 10 data points he recommends investors watch this year.

In his inaugural weekly note for 2018, Kelly says the list is his answer to a question he gets asked most often: “whether there is any one number which I track to get a sense of the investment environment … The answer is no — the economy and markets are honestly a little too complicated for that.” 

1. GDP growth. Kelly expects real GDP, which is adjusted for inflation and grew 3.1% and 3.2% in the second and third quarters of 2017, will finish 2018 up 3%, comparing Q4 2018 to Q4 2017. (The initial Q4 GDP won’t be released until Jan. 26 and the final number will be out March 28.)

Kelly expects a pickup in growth in early 2018 from a slowed 2.5% rate in the fourth quarter of 2017, then another tapering later in the year “due to a lack of pent-up demand among consumers and real difficulty in finding workers, which could limit both consumer and investment spending.” He anticipates just 2% growth in 2019.

2.  Unemployment. If 3% real GDP growth is achieved in 2018, the U.S. unemployment rate could fall to 3.4% by the end of 2018. That would be the lowest rate since 1969, the year of the first moon landing, Woodstock music festival and the start of Richard Nixon’s first term as president of the U.S.

3. Wages. Despite a very low unemployment rate currently – 4.1% in November, reported in the latest available data – U.S. wages have been growing slowly. (Kelly expects the next jobs report, due Friday, will show hourly wage growth under 2.5% year over year). “Some acceleration is likely in 2018, with year-over-year wage gains possibly heading to 3% by the end of the year,” writes Kelly.

4. Federal funds rate. Kelly expects the Federal Reserve will stick to its plan to reduce its balance sheet, which is already underway, and raise short-term rates at least three times in 2018. But if growth is stronger and unemployment is lower than the Fed has projected for 2018 — which is 2.5% for GDP year over year and 3.9% by Q4 2018 — then the Fed could hike rates four times in 2018, writes Kelly.

5. Long-term rates. “It is remarkable how low long-term yields have stayed despite a clearly improving global economy and Fed tightening,” writes Kelly, noting that the 10-year Treasury yield ended 2017 at 2.4%, down 5 basis points from the end of 2016.

He expects that will change in 2018 for a number of reasons — stronger U.S. growth, rising U.S. inflation and budget deficit, additional Fed rate hikes and less monetary accommodation among other central banks — and the 10-year Treasury yield could reach 3% by the end of 2018. “It seems unlikely that long-term Treasury yields could remain immune.”

6. Credit spreads. Monetary tightening in 2017 didn’t increase the cost of borrowing of consumers or businesses as credit spreads contracted, but this year it probably will, writes Kelly. “As Fed tightening continues and growth prospects weaken heading into 2019, further spread compression is unlikely.”

7. Earnings. S&P analysts expect S&P 500 operating earnings per share will finish 2017 near $125 and 2018 above $145 — both up 16% from the previous year. But Kelly notes that the 2018 projection is based in part on the new tax cuts law, which “will severely muddy the accounting, making it difficult to see either the net effect of tax reform or the offsetting impacts of strong growth but higher wages and interests on corporate income.  A key to understanding equities in 2018 will not just be forecasting earnings but interpreting them.”

8. Global manufacturing PMI (purchasing managers index). This monthly indicator, which may have reached a 6.5-year high at the end of 2017, “will be important to watch all year long, in part because of its impact on U.S. growth, but more importantly because of what it signals in terms of opportunities in global equities for U.S. investors,” writes Kelly.

9. The dollar. The U.S. dollar fell by roughly 10% in 2017 and could fall further in 2018 despite faster economic growth and a more aggressive Fed, writes Kelly. That could happen if investors look beyond the 2018 pickup in growth and focus instead on the long-term economic slowing, significant trade deficit and a White House “less enamored of a strong dollar.” 

10. Life expectancy at 65. It’s 83 for men and 85.6 for women for 2016, according to the latest stats from the Centers for Disease Control, which shows expectancy rising for older Americans but falling for Americans overall. Life expectancy at birth fell to 78.6 — the second consecutive decline in more than 50 years — due in large part to the increase in deaths from drug overdoses. Kelly reminds readers that the CDC numbers are just averages and that good genes, good personal health habits and access to good health care services can boost these numbers.

He concludes his Top 10 list with a key question: Whether Americans will be able to find long-term investments to finance the new year and many years to come given continued low cash yields.

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