Top investment trends of 2018 – and what you should be buying
The new year promises to be full of surprises for investors, as the market responds to events like the election of Trump, global political changes, and the promise of disruptive technology. Regardless of uncertainty, the outlook for the global economy this year is positive. 2016 was a good year for investors, and 2018 doesn’t look to be slowing down anytime soon. To better understand market trends in the new year, let’s recap 2016.
Despite Brexit confusion, the slowing of the Chinese economy, and oil production freezes, the stock market in 2016 finished strong. The Dow finished with 13.4% gains, and the S&P with 9.6% – both above-average yearly returns. Overall, the global economy grew 3.1%, and is expected to be surpassed in 2017 by 3.4% growth (according to the IMF).
How the Fed’s interest rate hikes will influence the markets
In December, the US Federal Reserve increased interest rates to 0.75%, the second increase in a decade since the 2008 global financial meltdown. The Fed’s interest rate is essentially the “mother of all interest rates” for central banks, meaning higher rates for everyone – for savings accounts, mortgages, and loans.
Traditionally higher rates on loans cut into business profits, cramping gains on Wall St. However, in our case the increase means normalization, as the Fed has grown more confident in the economy since 2008. This means stock prices will start to reflect fundamentals, as opposed to reacting to changes in monetary policy.
However, the Fed has three more interest rate hikes planned for 2018 – so be on the lookout for appropriate feedback in the markets.
The Trump effect
While he’s a complete wildcard – there are a few things we can confidently expect from the Trump administration. Donald Trump is sympathetic toward investors and business, promising widespread deregulation and lower corporate taxes – meaning more profits for everyone. The markets have only rallied since his inauguration, even hitting record highs (the Dow finally breaking 20,000).
Beside loosening restrictions on industry, Trump has also made four important suggestions for investors to be aware of 2018:
More infrastructure spending. Expanding infrastructure (like highways, rail lines, power stations, etc.) boosts economic growth and creates jobs.
- Caterpillar Inc. (CAT) Heavy machinery manufacturer. Up +51.1% since last year.
- Aecom (ACM). Major design and engineering firm. Up +44.9% since last year.
- United Rentals Inc. (URI) Equipment rental company. Up +160.4% since last year.
More energy independence. In other words, lower-cost oil from sources that were blocked by environmental regulations, like offshore drilling.
- McDermott International (MDR). Offshore drilling for oil and gas. Up +228.8% since last year.
- Williams Partners (WPZ). Natural gas. Up +122.0% since last year.
- W&T Offshore (WTI). Offshore drilling. Up +78.2% since last year.
More defense spending. Trump is currently trying to boost defense spending to the tune of billions of dollars. This means more orders for aerospace and defense systems companies.
- Boeing (BA). Aerospace, including military aircraft and defense systems. Up +50.0% since last year.
Privatization. Trump is a notorious advocate of privatization – taking institutions out of government control and putting them under for-profit management. This could mean privately-managed schools, prisons, healthcare programs, veterans benefits, infrastructure projects, and more.
Since Trump’s campaign, shares of private corrections company CoreCivic (formerly Corrections Corporation of America) have climbed sharply. Rumors of putting lenders Fannie Mae and Freddie Mac back in private hands sent share prices 45% higher.
- Federal National Mortgage Association (FNMA). Government-sponsored enterprise, supports the securitization of mortgages. Up +196.4% since last year.
- Federal Home Loan Mortgage Corporation (FMCC). Government-sponsored enterprise, supporting the securitization of mortgages. Up +191.2% since last year.
- CoreCivic (CXW). Private corrections company. Up +13.6% since last year.
What to watch for in tech
Who doesn’t love tech stocks? Tech stocks are massive growers in investment trades of 2018 too, with established revenue streams in products, services, and advertising – allowing them to experiment with advanced, up-and-coming technologies.
Companies like Apple, Alphabet, Amazon, Facebook, and Microsoft continue to develop technology like AR/VR (augmented reality/virtual reality), assisted and self-driving cars, AI, robotics, and stuff we probably have no clue about.
Here are some of the trends critics predict for tech in 2018:
IoT (Internet of things) will blur the line between appliances, handheld devices, and home systems. Smart home tech like Amazon Echo will become more popular and will integrate with more of your other products.
AR/VR tech will become more mainstream. In 2016 we saw the release of Pokemon GO (with over 100 million downloads), allowing anyone with a smartphone to test the AR waters.
Currently companies Alphabet, Facebook, Microsoft, Samsung, HTC, and Sony are all experimenting with VR headsets. Expect to see applications of AR/VR expand to gaming, shopping, job training, and social media.
Self-/assisted-driving cars will continue to advance, despite technological and legal hurdles.
- Apple Inc. (AAPL). Mobile and media devices, and related software. Up +41.3 since last year.
- Amazon Inc. (AMZN). Retail and web services. Up +58.0% since last year.
- Alphabet Inc. (GOOGL). Internet products, hardware, and advertising. Up +17.2% since last year.
- Facebook Inc. (FB). Social media and advertising. Up +27.0% since last year.
- Microsoft Corporation (MSFT). Hardware and software services. Up +24.7% since last year.
Automation of jobs in 2018
Let’s see, what are the investment trends of 2018 in automation. It currently powers 10% of manufacturing – and is expected to grow, displacing factory, agriculture, and low-skilled service jobs. It’s crucial to keep in mind in investment trends of 2018.
While repetitive manual and cognitive tasks are the first to be replaced, now increasingly complex roles are being tackled by robots. Automation may soon expand to more nuanced roles, like administrative jobs and diagnosing tumors.
- Yaskawa Electric Corporation (YASKY). Industrial automation. Up 64.8% since last year.
Investment trends of 2018: Mobile trading apps gain momentum
In 2016 mobile usage has overtook computers for email, social media, and shopping. As phones become more secure and usable, mobile trading has taken off. Broker TDAmeritrade now reports over 20% of its trades happen on mobile devices.
Trading no longer requires a large deposit, expensive commissions, education, or risky active management. Mobile trading apps not only allow you to check up on your portfolio from anywhere, but are also automating portfolios, cutting commissions, and making investing more frictionless. Trading apps are more popular for younger traders (the average user’s age is 26).
Each new trading app has its own unique angle, check these out for low-stress portfolio management, on-the-go trading, or set-and-forget investing.
- Robinhood (free trades)
- Openfolio (share and compare your performance to friends)
- Acorns (rounds up purchases and automatically invests the change)
- Wealthsimple (automatic balancing, no minimum)
But what do I suggest?
My suggestions are those two. You can read my full review about those here.
- Wealthfront (free up to $10,000, personalized diversification)
- Betterment (minimum of $1, automated portfolio, claims to outperform 88% of advisor-managed portfolios)
Foreign markets in 2018
Thanks to the Fed’s interest rate hike, the US dollar (USD) is strong. However, trade with emerging markets may stagnate as Trump has suggested a higher import tariff on goods produced overseas. This could also mean less returns and investors balking from emerging markets.
After Brexit, the British Pound (GBP) fell sharply and is still weak. Because London is Europe’s largest stock exchange, Brexit may take a toll on trading. The future is uncertain as institutions navigate the new situation.
In 2016 China devalued the renminbi (RMB), in order to keep its country competitive amidst fears of a slowing economy. The Chinese economy is only second to the US in GDP (although its been expected to overtake the US for years), and as the world’s largest manufacturer, it has a huge impact on the global economy.
Because the Chinese market may be in a slowdown or deflation in 2018, it would be best to keep an eye on any holdings, or be prepared to buy more as prices drop.
Real estate trends in 2018
In 2017-2018, US home sales are expected to increase, prices rising by an average 5.3% (according to Redfin). The Fed’s interest rate hike means mortgage rates will increase, getting indecisive buyers off the fence. In addition, Millennials are starting to enter the housing market, causing prices in large cities to increase (as well as spilling over into mid-size cities and inland states – where homes are cheaper). It plays an important role on investment trends of 2018.
In Europe, yields are down, real estate markets going into a slump following Brexit. This means investors may have to take on more risk for more yield.
Real estate in Asian markets continues to develop, especially in markets like Vietnam and the Philippines. Slowdown in China and strengthening of USD may impact investor’s returns, however.
Vanguard REIT Index Fund (VNQ). Up +11.1% since last year.
Dow Jones Asia/Pacific Select Index REIT (DWAPRT). Up +4.8% since last year.
Dow Jones Europe Select Index REIT (DWEURT). Down -11.5% since last year.
My investment suggestions
As someone who practices buy-and-hold philosophy of investing, I am long all the trends mentioned in this article. My favorite way to trade new trends is using ETFs, which offer the benefits of stock with more diversification and lower risk. ETFs usually beat the market, or what the average investor can do actively managing a portfolio.
The ETF market is growing, with a market cap of over $2.6 trillion. Currently there are over 1,900 funds on the market, 200 being added in the last year alone. To stay competitive, many ETFs in 2016 cut fees, and are expected to do the same in 2018.
My favorite way to play new trends is “thematic ETFs”, however I also hold large growth ETFs.
- First Trust Cloud Computing ETF (SKYY). Cloud computing stocks. Up +40.2% since last year.
- Robotics and Automation Index ETF (ROBO). Robotics and automation stocks. Up +42.0% since last year.
- S&P Semiconductors ETF (XSD). Semiconductor stocks. Up +52.7% since last year.
- PowerShares QQQ Trust ETF (QQQ). Growth stocks. Up +27.7% since last year.
- Vanguard Growth ETF (VUG). Large US growth stocks. Up +21.8% since last year.
- Vanguard Total Stock Market ETF (VTI). Represents 99.5% of US market cap common stock. Up +24.7% since last year.
2018 shows potential to be an interesting (yet profitable) year for investors. Of course, any time the outlook is too good calls for a healthy dose of skepticism. While the market has rallied and even set all-time records in 2018, it will pay to keep a pulse on current events as the year unfolds.
If you’re ready to start investing, then sign up for Betterment here.
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