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What Risks Could Investors Face in 2018?

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RANDY FREDERICK: By almost any measure, 2017 was a great year for investors. Global markets, including the U.S., notched gains in all 12 months for the first time ever. And, in fact, 2018 looks even better. Jeff Kleintop joins me for the January 23rd Schwab Market Snapshot to give us his take on why it might be wise for investors not to get too complacent.

So, Jeff, risk in the marketplace often comes from too many participants having too much confidence in one particular outcome. So from that perspective, what do you see as the greatest risks to investors in 2018?

JEFF KLEINTOP: Well, Randy, the biggest risk probably has to be geopolitics, and that could be a surprise for a couple of reasons. First of all, investors and business leaders are pretty dismissive of any negative impact from geopolitics this year. And, second, because we over the last year have been pretty—pretty much downplaying the impact of geopolitics, given a very strong global economic backdrop. But that could change a little bit. The economic backdrop may become more vulnerable as we look out to 2019, and that could make geopolitics—things like trade disputes or military conflicts—more impactful on the markets as the year matures. So that’s one risk.

Another one, staying on the theme of sentiment, could be that without the benefit of advice, individual investors tend to chase returns. They tend to chase the five-year rolling return in the markets. They buy more when it’s going up and they cut back as it’s coming down. Now, in our 2017 outlook, we cited this upturn in the five-year rolling return as a clear signal of the rebound in the buying of stocks that took place last year. That could reverse in 2018, mainly because we’re rolling off 2013 from that five-year rolling return, and that was a great year for stocks. So we could see that five-year rolling return begin to dip and perhaps individual investor buying along with it.

RANDY: So it kind of sounds to me like foolish investors often create their own risks, but what about those things that investors have no control over, things like unexpected Black Swan events or even market bubbles. How do you see those things impacting the markets this year?

JEFF: Well, there’s been a boom in investments that aren’t traded in public markets, like private equity and private debt. And if that boom were to become a bust and those markets remained illiquid, those investors would need to turn to the public markets to sell in order to raise needed capital—and that could pull down the public stock market. A risk that could prompt something like that is a sharp rise in inflation.

Now, markets are generally putting a low probability on a big enough rise in interest rates to cause a recession in the near-term. Yet global demand may finally exceed global capacity for the first time in 2018. And that may lead to a surprise rise in inflation and a more rapid series of rate hikes from the Fed, just like the last time it happened in 2004, and markets aren’t prepared for that.

Now, finally, I’d have to bring up natural disasters after the year we had in 2017. The markets have all but ignored disasters in the past, since they tend to spur economic growth, offsetting the widespread destruction they leave behind. But an increasing wave of disasters following last year’s record for destruction may mean the repeated costs of rebuilding outweigh their boost to growth, and that could mean—or could lead individual investors or other investors to adjust for the costs of a long-term rise in the frequency and impact of natural disasters, which could be negative for markets.

RANDY: So it’s never a good idea to get too comfortable. Great stuff, Jeff.

Listen, you can read more from Jeff in the Insights & Ideas section on Schwab.com. And you can follow Jeff on Twitter @JeffreyKleintop, and, don’t forget, you can always follow me on Twitter @RandyAFrederick. We’ll be back again. Until next time, invest wisely. Own your tomorrow.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

Please note that this content was created as of the specific date indicated and reflects the author’s views as of that date. It will be kept solely for historical purposes, and the author’s opinions may change, without notice, in reaction to shifting economic, market, business, and other conditions.

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Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Investing involves risk including loss of principal.

International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.

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