As 2017 winds down, we see some encouraging developments that could help extend the global bull market into 2018: The U.S. Federal Reserve (the Fed)’s leadership is moving to the safe hands of Jerome Powell, tax cuts are progressing through the U.S. Congress, and Europe has navigated most of its political landmines. The global growth momentum we witnessed in 2017 seems likely to persist into next year. However, many of our sentiment indicators also point to a near-time risk of a pullback. Could 2018 be a year of two halves?

Three scenarios for 2018

The critical issue we foresee is the timing of the next U.S. recession, as this almost always results in an equity bear market. The U.S. still dominates global markets and is further advanced in its cycle than other economies, which means that most scenarios for 2018 are likely to be driven by the U.S.  By next April, this will be the second-oldest U.S. economic expansion on record. The Business Cycle Index (BCI) model puts the probability of a U.S. recession in the next 12 months at around 25%, a high, but not alarming, percentage given the age of the expansion. This probability, however, could easily rise through the year, if, as we expect, the Fed tightens another three times in 2018.

In addition, credit and equity markets tend to price in recessions around 6-12 months ahead of time.Given all this uncertainty, we believe it’s best to look at various scenarios for 2018, rather than focus on one story. We think there are three plausible scenarios, with the central scenario the most likely:

Central scenario