As published in the Winter 2014 Edition of NJ Lifestyle
- Great Year in the Stock Market. All of the major U.S. Stock Indices finished with gains above 26%. The markets logged the best year since 1996 and volatility disappeared as the largest decline of the year was only 5% in the period May 21st to June 24th.
- Washington Gridlock: Congress did their best to derail the economy and the bull market. Lawmakers began the year by ending the social security tax holiday, which shrank all U.S. paychecks. Then, at the end of the first quarter, with Congress unable to reach an agreement on a budget, the across the board sequester cuts went into effect. In October, Congress was unable to pass a 2014 budget and the Federal Government was partially shut down for sixteen days. Congress finally got its act together and passed a two-year budget deal. Although this was not any grand bargain that so many were hoping for (as the two year budget does nothing in regards to entitlement or tax reform), it did give the markets and the economy some certainty from Washington.
- The economy improved as the year went on: All major economic data improved over the course of the year. Unemployment began the year at 7.9% and ended the year at 6.7%. The U.S. economy, as indicated by GDP growth, recorded growth of 1.1% in the 1st quarter, 2.5% for the 2nd quarter, and 4.1% for the third quarter. Continued improvement in these two areas is crucial for a successful 2014.
- Interest Rates finally started to rise and the 25 Year Bull Market in Bonds came to an end: The 10 Year U.S. Treasury Bill began the year at 1.756%. Ben Bernanke spooked the market in May when he hinted at an eventual taper in bond purchases and the 10 year U.S. Treasury yield rose 0.6% in 45 days, which represents an increase of 36.81%. By the end of the year, the 10 year sat at 3.026% and the Barclays Aggregate Bond Index finished negative for only the 3rd time in the past 25 years.
- The Federal Reserve began to taper its bond buying on a monthly basis by $10 billion. The Fed’s repression of interest rates might finally be coming to an end in the next year or so, as the current round of quantitative easing (or interest rate manipulation as many call it) is wound down.
Some takeaways from 2013:
- Bonds can lose money. After a 25 year bull market in bonds, investors were reminded that bonds can decline in value.
- Most predictions should be taken with a grain of salt. In January 2013, most expectations for equity markets in 2013 were for high single digit, low double digit returns from stocks. The actual returns were two and a half to three times that and show that markets are no easier to predict than the weather.