Although the economic expansion has delivered steady gross domestic product (GDP) growth, consistent returns for the broad stock market, and an improving job market, the expansion itself has been lackluster. While we’re still set in a familiar scene, solidly in this economic expansion, we need some new characters to take charge—to bring the market back to its traditional roots and raise the bar on what we expect from global growth, a continued expansion, and one of the longest and largest bull markets in history.1 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 often talk about cycles in terms of the economic periods of recession and expansion. And while we’re not returning to the beginning of that economic cycle, what we’re referring to here is a return to the traditional drivers that propel the cycle. We are looking to the forces that have historically supported economic and market growth, before we entered this recent period of accommodative monetary policy. The economic cycle still matters and we put ourselves solidly in the second half, although with a potentially low likelihood of a recession starting in 2018. But what may be more important in the next year is the fundamental shift we’ve experienced in what’s driving the cycle and what it means for businesses and investment returns. In short, 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 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.

• 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.

Required Attribution & Disclosure

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results. Estimates may not develop as predicted. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise, and bonds are subject to availability and change in price. Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate, and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate. Municipal bonds are subject to availability and change in price. They are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply. If sold prior to maturity, capital gains tax could apply. International and emerging markets investing involves special risks, such as currency fluctuation and political instability, and may not be suitable for all investors. Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is essentially net income with interest, taxes, depreciation, and amortization added back to it, and can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions. There is no guarantee that a diversified portfolio will enhance the overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk. All investing involves risk including loss of principal.
DEFINITIONS Small cap is a term used to classify companies with a relatively small market capitalization. The definition of small cap can vary, but it is generally a company with a market capitalization of between $300 million and $2 billion. The prices of small cap stocks are generally more volatile than large cap stocks.
INDEX DESCRIPTIONS The Bloomberg Barclays Municipal Bond Index is a market capitalization-weighted index of investment-grade municipal bonds with maturities of at least one year. All indexes are unmanaged and include reinvested dividends. One cannot invest directly in an index. Past performance is no guarantee of future results. The Standard & Poor’s 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 S&P Midcap 400 Stock Index is an unmanaged index generally representative of the market for the stocks of mid-sized U.S. companies. The S&P Small Cap 600 Index is an unmanaged index generally representative of the market for the stocks of small capitalization U.S. companies.

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