Will 2018 be another perfect year for stocks?

Stock markets are rallying, central banks are drifting to the exit as low inflation persists, and economies are enjoying the benefits of synchronised growth — what could possibly go wrong?

It seems 2017 was a so-called “Goldilocks” year for investors — that is, not too hot, not too cold, but just right. Yet, according to Ralph Jainz, fund manager at Centricus Asset Management, 2018 will be the opposite of Goldilocks.

During a recent interview on CNBC, he warned that companies are facing growing wage pressures, and will either pass on those higher costs, or assume cost pressures and face lower margins.

US margins peaked nearly two years ago and Europe is also likely to have seen the best of the margin cycle, said Jainz.

If he’s right, the picture is alarming, because it suggests inflation could trigger more interest rate hikes than the market expects.

The prospect of profit margins being at risk is also worrying, given that investors are already nervously looking for earnings season to justify gains. So where does one look for signs of a market rolling over?

Jainz nominated small-cap stocks, given that three small-cap indexes all peaked in June 2007.

But there are conflicting views that test the notion that Goldilocks is indeed finished.

One is that corporates have a trick or two up their sleeve to tackle wage pressures. Another more popular view is that the inflation mystery continues to confound central bankers, while rewarding investors.

Take the first point. Sainsburys revealed its strategy last week, with chief executive Mike Coupe telling CNBC it had covered a four per cent pay rise for staff with further cost cutting.

Cutting to spend is a long adopted strategy by the c-suite, but in some sectors investors would be right to ask: how much more cost-cutting can be achieved?

Companies can also spend to cut costs, which many have avoided since the financial crisis.

But the US tax overhaul could be the trigger. Steve Blitz, chief US economist of TS Lombard, believes that margins will hold together as companies facing wage pressure will spend on investment.

Capital expenditure often means buying equipment for automation, reducing the need for as many workers, and removing higher wage demands. However, the Trump administration has said the tax bill will simply create “jobs, jobs, jobs”.

Sceptics dismiss this claim. Carl Weinberg, of High Frequency Economics, believes wage pressure will not materialise, and corporates will not significantly increase capital expenditure, which will keep Goldilocks in play for markets.

While recruitment agencies and companies warn of a lack of skilled employees to fill positions, data reveal little wage pressures.

According to the recent JOLTS report, a there was a slight drop in the number of people quitting positions. Lower turnover ultimately reduces pressure on employers to lift wages.

The conclusion? 2018 is not an easy read and the market promises too many adventures for investors to be comfortable about a fairy tale ending.

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