AAII Greensboro Chapter

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What Do Fed Policy Mistakes and High Valuations Say About Future Returns? 

03-22-2023 13:21

The stock market’s long run average return of 10% is not realized by a return of 10% each year. That average hides plenty of volatility and periods of very low returns (see 1966 – 1982 and 1995 - 2009). High return periods (bull markets) typically start when valuations are low and rise over time along with earnings growth. Low return periods (bear markets) typically begin when valuations are high and subsequently fall over time along with falling earnings growth. Even after the year-to-date declines, equity valuations remain about average at best. Valuations typically fall below average during bear markets so complacency after the recent decline may be dangerous to your portfolio’s health. We will discuss today’s environment given the Fed’s policy mistake, future return prospects, and ways to play defense.

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