For nearly a decade, businesses have been operating in a relatively slow growth environment. Chastened by global financial crisis of 2008–2009, corporate decision makers were satisfied maintaining market share and rewarding shareholders with buybacks and dividends. The low interest rates that were intended to drive businesses to invest in their growth and take some entrepreneurial risk instead had the opposite effect.
Growth incentives were lacking in the midst of central bank interventions, low interest rates, and a tight rein on lending. The Federal Reserve (Fed) provided a lot of support, yet monetary and fiscal policy failed to work in tandem to spur growth. Preferring mediocrity to volatility, many businesses played it safe.
According to LPL Research, this situation has changed, as economic growth will rely less on the Fed and more on fiscal stimulus in the form of government spending and tax cuts, and fundamentals such as corporate earnings and reinvestment. In the LPL Research Outlook 2018: Return of the Business Cycle, we will examine the resurgence of catalysts that traditionally move the economy and markets forward and the implications for businesses and investors.
When monetary policy is no longer the primary driver of economic activity, businesses may seek to separate themselves from the crowd and reinvest in property and equipment to capture more market share. Better corporate performance and increased spending could prompt higher earnings, with the prospect of lower corporate taxes providing a welcome boost. With this differentiation among businesses, there will be winners and losers. As a result, we could see an increase in market volatility—but also a better environment for active management.
Be on the lookout for our late November release of the LPL Research Outlook 2018: Return of the Business Cycle, which presents the opportunities, challenges, and insightful guidance to arm investors for the year ahead.