8 Themes for '18

Aging Market Cycle Poses Risk and Reward

With U.S. equity valuations one standard deviation above their historical average, we maintain a positive—yet increasingly cautious—outlook for the asset class. Similarly, the credit cycle continues to tread water as corporate bond spreads approach pre­ crisis levels. The catalyst for the market advance has shifted from monetary stimulus to a combination of fiscal stimulus and strong corporate earnings. These catalysts should support risk assets in the United States in the near term. However, the strong rally in 2017 has further reduced the valuation cushion left to protect against bouts of uncertainty or volatility in the new year. This could create tailwinds for active managers who have a contrarian view or a short portfolio.

Value to Regain Ground Against Growth

In 2017, the Russell 1000 Growth outperformed the Russell 1000 Value by roughly 17 percentage points (30.2% vs. 13.6%) as the information technology sector rallied close to 40% in the period. This represents a one standard deviation dispersion between the two indices, the largest since the 2001 tech bubble, and marked a reversal from 2016 when the value style was a strong performer. We have a favorable outlook for value, as we believe there are strong upside prospects for certain sectors within the value factor such as financials (32% weighting) amid lower corporate tax rates and a rising rate environment in 2018. However, a favorable view of the value factor in 2018 should not be at the expense of abandoning the growth factor, as active managers who are aware of the factor exposures in their portfolio can manage risk accordingly.

Next-Generation Fed in Focus

Amid strong economic data and limited inflation pressure, the Federal Reserve is signaling another three rate hikes in 2018. Despite the transparent and calculated response of the Fed to this point, uncertainties remain under the new oversight of Jay Powell and a highly modified FOMC. Assuming incoming Chairman Powell attempts to maintain the status quo, our expectations will remain mostly unchanged for the path of monetary policy. As a result, we expect a gradual rise in interest rates heading into next year with the wild card being inflation. If inflation surprises to the upside, then the Fed may need to become more aggressive with rates.

Increased Corporate Activity

According to Fed data, U.S. nonfinancial corporations held a record $2.36 trillion in liquid assets as of the end of the third quarter, up nearly 60% since the recession ended in 2009. A large percentage of these assets are held overseas. With uncertainty over tax reform no longer an issue with the passage of the Tax Cuts and Jobs Act of 2017, we believe companies are likely to capitalize on the favorable interest­rate and tax environment in 2018 with capital investments and repatriation.

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The opinions expressed herein are subject to change without notice. The information and statistical data contained herein has been obtained from sources we believe to be reliable. Past performance is not a guarantee of  future results. The above discussion is for illustrative purposes only and mention of any security should not be construed as a recommendation to buy or sell and may not represent all investment managers or mutual funds bought, sold, or recommended for client’s accounts. There is no guarantee that the above­mentioned investments will be held for a client’s account, nor should it be assumed that they were or will be profitable. The Consulting Group is a pision of Oppenheimer Asset Management Inc. (OAM). OAM is an indirect, wholly owned subsidiary of Oppenheimer Holdings Inc., which also indirectly wholly owns Oppenheimer & Co. Inc. (Oppenheimer), a registered broker dealer and investment adviser. Securities are offered through Oppenheimer.

For information about the advisory programs available through OAM and Oppenheimer, please contact your Oppenheimer Financial Advisor for a copy of each firm’s ADV Part 2A. Adopting a fee based account program may not be suitable for all investors; anticipated annual commission costs should be compared to anticipated annual fees.

Risk Factors

The success of an investment program may be affected by general economic and market conditions, such as interest rates, the availability of credit, inflation rates, economic uncertainty, changes in laws and national and international political circumstances. These factors may affect the level and volatility of securities prices and the liquidity of a portfolio’s investments. Unexpected volatility or illiquidity could result in losses.

Investing in securities is speculative and entails risk. There can be no assurance that the investment objectives will be achieved or that an investment strategy will be successful.

Special Risks of Foreign Securities

Investments in foreign securities are affected by risk factors generally not thought to be present in the United States. The factors include, but are not limited to, the following: less public information about issuers of foreign securities and less governmental regulation and supervision over the issuance and trading of securities. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.

Special Risks of Small and Mid Capitalization Companies

Investments in companies with smaller market capitalization are generally riskier than investments in larger, well established companies. Smaller companies often are more recently formed than larger companies and may have limited product lines, distribution channels and financial and managerial resources. These companies may not be well known to the investing public, may not have significant institutional ownership and may have cyclical, static or moderate growth prospects. There is often less publicly available information about these companies than there is for larger, more established issuers, making it more difficult for the Investment Manager to analyze that value of the company. The equity securities of small­ and mid­capitalization companies are often traded over­the­counter or on regional exchanges and may not be traded in the volume typical for securities that are traded on a national securities exchange. Consequently, the investment manager may be required to sell these securities over a longer period of time (and potentially at less favorable prices) than would be the case for securities of larger companies. In addition, the prices of the securities of small­ and mid­ capitalization companies may be more volatile than those of larger companies.

Special Risks of Fixed Income Securities

For fixed income securities, there is a risk that the price of these securities will go down as interest rates rise. Another risk of fixed income securities is credit risk, which is the risk that an issuer of a bond will not be able to make principal and interest payments on time.

Special Risks of Master Limited Partnerships

Master limited partnerships are publicly listed securities that trade much like a stock, but they are taxed as partnerships. MLPs are typically concentrated investments in assets such as oil, timber, gold and real estate. The risks of MLPs include concentration risk, illiquidity, exposure to potential volatility, tax reporting complexity, fiscal policy and market risk. MLPs are not suitable for all investors. 2005264.1