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EXECUTIVE SUMMARY
- Global stocks and bonds rose in the fourth quarter of 2022 to cap the worst year since 2008 for stocks and the worst year ever for bonds.
- Historically, asset classes tend to perform well after such a poor performance.
- It seems like the Fed is on track to achieve its inflation target after the fastest tightening cycle on record. The economy is slowing, and inflation is dropping from a record high reached last summer.
- An index of Leading Economic Indicator is declining sharply reflecting a strong possibility of a recession.
- The Democrats are in control of the Senate and the Republicans are in control of the House, leading to a split congress. This is very likely going to lead to a gridlock in major issues especially around fiscal policy.
- While past performance has no bearing on the future, historically, the equity market (S&P 500) has returned on average over 13% during a split Government.
- Corporate earnings are expected to have grown by 5.1% in 2022 and are expected to grow by 5.5% in 2023.
- Stocks are cheaper than their 25-year average. Historically, when stocks were valued at this level, they had positive 1-year and 5-year forward returns.
- US stocks and international stocks move in long cycles and a diversified portfolio should have allocation to both.
The stocks of profitless, innovative companies have crashed and are doing worse than old economy stocks