Our investment team is always seeking to identify the most attractive investment opportunities with a goal of protecting and growing the wealth of our clients. To this end, a considerable amount of research is dedicated to uncovering and understanding the trends and developments expected to shape markets and drive returns in the years ahead.  Against this backdrop and amid the second longest bull market in history, the following are our insights on four key questions facing investors in 2018.

1. Can the global economic recovery stay on track for another year?

We have a high degree of conviction that the synchronized global economic recovery will continue into 2018. The U.S. economy has posted three straight quarters of greater than 3% real GDP growth. In the U.S., the current economic expansion is more than eight years old — a data point that’s in and of itself creating some anxiety.  However, strong fundamentals remain intact and economic recoveries don’t simply die of old age.

Looking abroad, after years of lagging the U.S. and U.K., a broad-based economic recovery has taken hold in Europe and the data out of Asia is encouraging. In China, despite expectations for slower economic growth, the world’s second largest economy is expected to log its first full year of economic acceleration in seven years.

The bigger issue is that the economy does not equal the stock market. Stocks have posted two consecutive years of double digit returns. It is certainly possible that this could happen a third consecutive year — but it doesn’t happen often. Since 1970, it happened from 1995-1999 and again from 2012-2014. A more common scenario has been to see the market take a pause and provide a much lower return.

U.S. stock valuations are historically high, volatility has been historically low, and we haven’t seen even a 3% sell-off in the stock market in 2017. It has been the best of worlds for stock market investors. A good strategy for 2018 may be to rebalance portfolios to your long-term strategic targets if stocks have become an oversized part of your portfolio. If stocks continue to rally, then you participate. If stocks have a challenging 2018, then you are better protected.

2. Will the Federal Reserve hit any additional speed bumps on the road to rate normalization?

Consistent with their projections at the start of the year, the Federal Reserve (Fed) raised the benchmark interest rate for the third time this year in mid-December. Looking ahead to 2018, questions abound on whether Fed officials will be able to continue to follow the current path of gradual rate increases while proceeding toward balance sheet normalization.

Despite the unemployment rate falling to its lowest level in 17 years, wage growth has not responded accordingly, and inflation remains persistently low. With the U.S. dollar strengthening and inflation puzzling policy makers, it is hard to see the Fed raising rates another three times in 2018. We think investors should be prepared for two hikes — unless inflation shows signs of increasing.

We don’t see longer-term interest rates moving much higher — 3% is the high end of the range we foresee for the 10-year Treasury bond. As a result, we are positioning bond portfolios with intermediate-term durations, only slightly shorter than benchmarks.

3. Is it too late to benefit from the rally in international stocks?

While U.S. stocks as measured by the S&P 500 are on pace to finish the year with very strong gains (up 17% at the time of this writing), 2017 will likely be the first year since 2012 that international equities outperform U.S. stocks, as international stocks are up more than 20% and many emerging markets have logged gains in excess of 30% this year.

In the wake of these gains, foreign stock valuations are not as attractive as they were at the start of 2017; however, they are better than U.S. equity valuations. We remain bullish on international equities in 2018. In Europe, low interest rates and inflation are translating to stronger business investment and higher levels of domestic consumption, which will benefit both small and large companies. And across emerging markets, a range-bound U.S. dollar, coupled with higher oil prices and improving economic data out of China, should continue to drive strong economic growth and corporate earnings.

4. Are 2017’s Healthcare and Technology gains sustainable?

Strong earnings growth, improving economic growth and a favorable regulatory environment put healthcare and technology stocks in a leadership position for much of 2017. Looking ahead, we could see leadership change. The sectors we are most positive on include technology, financials and energy.

Energy was a laggard in 2017, but could be setting up for outperformance in 2018 due to a positive supply-demand relationship and a reduction in capital expenditures by energy producers.  Financials are appealing given the overall health of the industry combined with improved (higher) interest rate environment, tax reform, and the softer regulatory environment. Technology is unlikely to dominate as it did in 2017, but broadly speaking the sector is not overvalued and many companies seem able to push through price increases — unlike in many other industries.

Be sure to join us for our upcoming quarterly webinar for the investment team’s latest economic and market insights and an opportunity to submit your questions.

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The opinions expressed above are given in good faith, may be subject to change, and are as of the date issued. This article discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice and does not represent a complete analysis of every material fact with respect to the economy, financial markets, interest rates, and any industry mentioned in the publication. Investment products such as stocks, bonds, and mutual funds may lose value and are not insured or guaranteed by Boston Private Bank & Trust Company or any of its affiliates or by the Federal Deposit Insurance Corporation and any other government agency.