Return of the Business Cycle
At LPL Research, we’re looking ahead to a “return of the business cycle.” Instead of relying on intervention by the Federal Reserve (Fed) to propel employment and personal consumption, we will turn to fiscal policy and improving business fundamentals to spur further growth in the economy and stock market. Regarding fiscal policy, we’ll look for
increased government spending and tax cuts, which could provide added support for businesses in terms of revenue, earnings, and future growth prospects.
We expect to return to an environment in which investors may be rewarded for their ability to focus on business fundamentals, as markets respond to the shift from monetary to fiscal support and greater incentives for entrepreneurial risk-taking.
The Return of the Business Cycle will be characterized by:
- Fiscal Coordination: The next step for the U.S. economy will involve some combination of infrastructure spending, tax reform, and regulatory relief. The political environment remains challenging, but the economy has exhibited impressive momentum after a slow start to 2017. There has also been progress on the policy front, and we expect corporate tax cuts to be a primary contributor to economic activity in 2018.
- Business Investment: Early in the expansion, business investment slowed, and productivity suffered. Now companies are using cash differently, focusing on increasing productivity and attaining greater market share. To remain successful, businesses will need to invest in property, plants, and equipment.
- Earnings Growth: For stocks to produce attractive returns, earnings growth will be a key factor in 2018. Better global growth, a pickup in business spending, and lower corporate taxes should all support better earnings.
- Active Management: The dynamics that have supported passive strategies in recent years have begun to fade. A return to fundamental investing—where investors can determine winners and losers based on earnings, sales, cash flow, etc.—should lead to continued momentum for active management in 2018.
- Bonds as Risk Diversifiers: Although the fixed income market will be under pressure due to higher interest rates, bonds—especially high-quality—will remain an important part of well-balanced, diversified portfolios. Bonds can help mitigate portfolio risk should we experience any equity market pullbacks.
The LPL Research Outlook 2018: Return of the Business Cycle reminds investors of where we have been, what we have accomplished, and why the return of these market forces may bring new opportunities for market participants. With this guidance and investment insight, investors will be ready to embrace this market environment in their search for long-term success.
Click this link to open in a new window; or right click to save as a .pdf: Outlook 2018: Return of the Business Cycle