The recently released LPL Research Midyear Outlook 2018: The Plot Thickens is filled with investment insights and market guidance to take us through the rest of the year. So far this year, the return of the business cycle has brought the fiscal policy changes that were expected to propel economic activity and the financial markets higher in 2018.
Policy remains a key theme to watch. Tax cuts, a more business-friendly regulatory environment, and increased government spending should support consumer spending, business investment, and corporate profits—key drivers of LPL Research’s economic and stock forecasts. The biggest risk to investor confidence this year has been around trade, including new tariffs. When comparing the fiscal measures with the potential impact of increased tariffs, however, the benefits appear to outweigh the costs. With these factors in mind, policy changes should have a positive influence on the economy and markets.
Another theme that may garner more attention this year is that certain economic and market indicators may have peaked, and that we may have seen the best out of this expansion. However, the context is critically important here. Reaching these points with a strong economic backdrop is expected and indicates the potential for continued growth; in addition, historically, we’ve seen an average of four more years of stock gains after triggering these market signals. So, although we are in the later stages of the economic cycle, it does not appear that a recession is looming.
Against this backdrop, LPL Research maintains the forecasts that were set forth at the beginning of 2018, following the passage of the new tax law. Expectations are for 3% gross domestic product growth for the U.S. economy, with tax cuts, government spending, and deregulation measures providing support. As expected, accelerating economic growth and rising interest rates continue to pressure bonds; thus, flat to low-single-digit returns are projected for bonds (as measured by the Bloomberg Barclays U.S. Aggregate Bond Index). However, it’s prudent to note that high-quality bonds may provide diversification benefits for investors’ portfolios.
Strong earnings are expected to remain the key driver of stock gains, thanks to the benefits of the new tax law. Given that we are in the later stages of this economic cycle, with factors such as increased trade tensions and geopolitical uncertainty at play, greater market volatility may be ahead. But it’s important to remember that experiencing these ups and downs is a normal aspect of our market environment. Also, within the context of steady economic growth and strong corporate profits, there is the potential for stock gains of 10% or more (as measured by the S&P 500 Index).
Overall, economic and market growth is expected to continue in 2018 and beyond, and the LPL Research Midyear Outlook 2018 is here to provide insightful commentary to help you navigate the year ahead. If you have any questions, I encourage you to contact me.
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.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a nondiversified portfolio. Diversification does not ensure against market risk.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
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, fixed-rate 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).
Additional descriptions and disclosures are available in the Midyear Outlook 2018: The Plot Thickens publication.
This research material has been prepared by LPL Financial LLC.