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2013 Forecast: Good Economy, Challenged Markets

January 2, 2013

We enter 2013 bombarded by con? icting signals. While fundamentals have been mixed of
late, longer-term themes — our “tectonic shifts” like the energy revolution — are gaining
momentum and promising to make positive contributions sooner rather than later. And
while salutary measures taken by policymakers have eased global risks and lessened fears of
Armageddon, there is considerable work yet to be done.

-Doug Cote, chief market strategist, ING Investment Management

 

2013 Forecast: Good Economy, Challenged Market

  • We enter 2013 bombarded by conflicting signals. While fundamentals have been mixed of late, longer-term themes — our “tectonic shifts” like the energy revolution — are gaining momentum and promising to make positive contributions sooner rather than later. And while salutary measures taken by policymakers worldwide have eased global risks and lessened fears of Armageddon, there is considerable work yet to be done.

 

  • The global economy is in reasonably good shape if you look only at the level of economic progress. Based on several key metrics the U.S. economy made it through recovery and moved into expansion since the trough of the Great Recession. The crisis that has consumed Europe in recent years has abated thanks to strong policy action. Emerging markets largely avoided the debt crisis, becoming a bright spot for world growth and trade. Unfortunately, markets do not buy levels — they buy growth. And growth from here looks to be a challenge.

 

  • Given a plethora of mitigating factors, we have been only moderately concerned by the global risks over the past few years. But the wind is not in the sails of the fundamentals heading into 2013. For example, quarterly year-over-year earnings growth of the S&P 500 — our primary fundamental market indicator and typically a reliable predictor of future earnings growth — went negative in the third quarter. The S&P 500 derives more than half its revenue from overseas, and there is no question that a global economy under duress is pressuring corporate profits.

 

  • The fundamentals we explain in our forecast have led us to a defensive stance as of the first business day of January 2013. While we remain broadly and globally diversified, we have tilted our bias away from equity and toward fixed income. 

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