Outlook 2018- Return of the Business Cycle
We are pleased to announce the release of the LPL Research Outlook 2018: Return of the Business Cycle,(click for pdf) filled with investment insights and market guidance for the year ahead. We expect traditional business cycle drivers to take a larger role in spurring further economic and market growth in 2018, as we have experienced a fundamental shift in the forces behind this continued economic expansion. Our Outlook 2018 highlights some of the ways this economic expansion has been unusual thus far, and what we may expect moving forward.
The return of the business cycle is not about where we are in the cycle, but about what’s driving the cycle and what it might mean for investors. For the majority of this economic cycle, accommodative monetary policy has supported growth and the markets have relied on central bank intervention to keep the expansion going. We’ve
already started to see a directional change by the Federal Reserve (Fed), coupled with companies’ increased need to focus on growth, resulting in a new dynamic for business leaders and investors.
Given this shift, we believe the return of the business cycle will be characterized by:
Fiscal coordination, with some combination of infrastructure spending, tax reform, and regulatory relief.
Given recent progress on the policy front, we expect corporate tax cuts to be a primary contributor to economic
activity in 2018.
Business investment in property, plants, and equipment. Companies are using cash differently now, focusing
on increasing productivity and attaining greater market share.
Earnings growth, supported by better global growth, a pickup in business spending, and potentially lower
Active management, which should see continued momentum thanks to a return to fundamental investing,
where investors can determine winners and losers based on earnings, sales, cash flow, and so on.
Against this backdrop, we expect economic growth — as measured by gross domestic product (GDP) — of 2.5%, thanks to fiscal support, a pickup in business spending, and steady consumer spending. We forecast returns of 8–10% for the broad stock market (as measured by the S&P 500 Index), with earnings growth the primary driver. And given our expectations for a gradual increase in interest rates, we expect flat to low-single-digit returns for bonds, as measured by the Bloomberg Barclays U.S. Aggregate Bond Index. We believe bonds remain an important part of a well-diversified portfolio, however, particularly in the event of stock market pullbacks.
We believe this return to the business cycle has the potential for success, where investors may be rewarded for their ability to focus on business fundamentals. However, an aging expansion and a leadership transition at the Fed may increase the likelihood that stock market volatility picks up in 2018. As always, we emphasize maintaining a long-term perspective and a well-balanced portfolio.
The LPL Research Outlook 2018: Return of the Business Cycle provides insightful commentary to help you
navigate the year ahead. If you have any questions, please contact your financial advisor.
EVP, Chief Investment Strategist
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This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC
is not an affiliate of and makes no representation with respect to such entity.
Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual
security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical
and is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly.
Economic forecasts set forth may not develop as predicted.
The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the
aggregate market value of 500 stocks representing all major industries.
The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment-grade, U.S. dollar-denominated, fixedrate
taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs),
ABS, and CMBS (agency and non-agency).
Active management involves risk as it attempts to outperform a benchmark index by predicting market activity, and assumes considerable risk should managers
incorrectly anticipate changing conditions
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a nondiversified portfolio. Diversification does not ensure against
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise and
bonds are subject to availability and change in price.
Additional descriptions and disclosures are available in the LPL Research Outlook 2018: Return of the Business Cycle publication.
The information in this letter has been prepared from data believed to be reliable, but no representation is being made as to its accuracy and completeness.
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