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A Stock Market Bull Makes His Case

In his new book, "Predicting the Markets: A Professional Autobiography," Ed Yardeni, a market strategist and president of investment research firm Yardeni Research shares the lessons he has learned over 40 years as a market prognosticator. Anne Kates Smith, Kiplinger’s Personal Finance recently interviewed Yardeni.

Q: Where do you see the U.S. stock market headed for the rest of 2018?

A: My target for Standard & Poor's 500-stock index is currently 3100. The market has been spinning its wheels, going nowhere, since the end of last year. There has been a lot of noise about issues that could cause problems, such as a rebound in inflation leading to higher interest rates or President Trump's protectionism. But I don't think inflation is coming back, and I don't think we'll have a trade war. Meanwhile, corporate earnings expectations have soared thanks to Trump's tax cuts and solid global economic growth.

Q: Where should investors put their money now?

A: You want to invest globally. Since early 2016, we've seen mounting evidence of a global, synchronized economic expansion. That will continue for a while, although there could be some sputtering along the way. Put half of your stock portfolio in U.S. stocks, 30 percent in Europe and Japan, and the rest in emerging markets.

Q: What's supporting the bull market?

A: Corporations have gotten a windfall from the impact of tax cuts. Much of that money will go into share buybacks, a major reason the market is rebounding from this latest correction. Also, I don't know of anyone saying a recession is imminent or foreseeable this year or next year. Instead, excesses are being corrected by rolling recessions hitting different industries, such as energy or retail.

Q: What are you most worried about?

A: The key issue for investors is inflation – and, by the way, it always has been and always will be. Inflation drives interest rates and Federal Reserve policy. If you see accelerating inflation, there's a good chance you're in the midst of an economic boom with speculative excesses. I'm not saying there will never be a recession again, but as long as inflation remains subdued, as I expect, there's no reason for the Fed to raise rates to levels that cause a credit crunch and recession.

Q: What's your best guess for when this aging bull market will end?

A: Age doesn't have much to do with it. Bear markets are almost always associated with recessions, although the stock market usually turns down a few months beforehand. The longer you believe the economic expansion can last, the more bullish it is. Back in 2014, I predicted that the expansion could last until 2019. That looked iffy then, but here we are, and I don't see a recession happening this year, or in 2019 or even in 2020.

Editor’s Note: Anne Kates Smith is executive editor at Kiplinger's Personal Finance magazine, www.Kiplinger.com.

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