The Equity Markets
2013 was a very strong year for the US Equity Markets and the outsized returns came as a surprise to even the most seasoned investment pundits. The US broad market had advanced 16.44% during 2012. Going into 2013, market consensus was for a tempered 8% gain, most citing GDP drag as a result of sequestration, government shutdown and tax increases. However the US economy muddled through and the US broad market surprised wildly to the upside delivering final quarter returns of over 10%.
The DJIA which has advanced for its fifth straight year had its biggest yearly gain since 1995 and returned 26.50% and the S&P 500 advanced 29.57% logging its best year since 1997. Not to be outdone, the Russell 2000 returned 37.03% in 2013, its biggest rally since 2003. Sector leaders included consumer discretionary and health care.
International Markets were mixed in 2013. China engineered a soft landing and markets turned mildly positive. Latin America performed poorly across the board. Japan was up 51% while India was only up slightly at 4%. The Stoxx Europe 600 benchmark rose 17% boosted by a gradual improvement in the European economy and an easing of their own debt crisis, driven in part by their own global central banks easy money policies.
Emerging markets lagged and are now trading on a discounted basis to the US market despite having faster growth prospects. For the year 2013 the MSCI EM market index was negative (4.96%). These markets deserve a second look as their fortunes will rise again. It’s not a matter of if they will rise but rather when they will rise. According to the World Economic Forum emerging countries now account for 25% of the world’s top 500 companies. Investors should take note.
The Bond and Credit Markets
At its December meeting, The Fed once again kept the Federal funds rate unchanged at just 25 basis points but initiated a further wind down or “tapering” of its long term treasury monthly bond buying program to $40 billion from the current $45 billion and reducing its mortgaged back securities purchases to $35 billion from $40 billion. The Fed indicated that policy will stay further accommodative as long as the unemployment rate stays above 6.5% and inflation remains in check.
The 10 year Treasury note and 30 year Treasury bond moved dramatically in 2013 and ended the year with a yield 3.02% and 3.944% respectively as opposed to 1.76% and 2.95% when the year began.
The Barclays Agg index dropped 2.02% for the year for its first decline since 1999.
The Economic Indicator Diffusion Index measures the pace at which economic indicators are coming in ahead or below estimates over a 50 day period. It is currently trending positive. The key to watch going forward is whether the pace of economic data will continue to come in ahead of expectations. The Fed must be careful that it does not find itself falling behind the curve, because if it is forced to increase the rate of taper or even actually raise short term rates sooner than planned it could present a shock to the markets.
The roughly 100 bpt rise in interest rates has already translated into higher mortgage rates for home purchasers. This should be monitored however as the housing recovery could suffer with further increases.
Gold and precious metals performed very poorly during 2013 primarily due to two reasons:
- Stabilized US Dollar
- Equity risk off trade in full force 2013.
Gold, which began the year at $1,674 dropped sharply, ending the year at $1,218 declining nearly 28% during 2013. Oil closed the year higher at $98.50 per barrel after starting the year at nearly $92. Silver declined by (35%). Agricultural commodities were down sharply in 2013 with corn, coffee, sugar, and wheat all lower by double digits.
We continue to grow and invest in our business
We are very pleased to welcome Frank Thomas, CPA PFS as an addition to our team in the senior role of financial planner and investment advisor. Frank may be familiar to those whom attended our social security seminar a few years back. He is well known and admired in the community where he’s taught accounting for many years at Richard Stockton College. We certainly feel Frank aligns with our own corporate culture of doing what’s right for the client by embracing the fiduciary standards of the independent advisor. We thought it necessary to have another qualified advice giver and planner in the firm to ensure that you, our client, continue to receive the highest standard of care and attention that you deserve. Frank is a highly qualified and trusted resource now available to all CRA clients.
2014 could present some hiccups
2013 proved to be an excellent year in the US equity markets despite a slow but stable US economy. 2014 may offer the reverse, with an economy gaining momentum in the presence of a slower paced or even a punk stock market. Investors should not count on a repeat 2013 US equity performance and would be probably best served to exhibit the courage to rebalance their accounts and rotate capital into 2013 poorer performing lesser correlated asset categories.
During 2013 there were just five sell offs of 2% or more for the S&P 500, the worst being a 5% decline from May 21 through June 24, 2013. 2014 will most likely bring a market draw down or even a correction, which is now long overdue. That being said US equities in particular should ultimately move higher during 2014 due to diminished uncertainties, rising confidence and improving economic fundamentals including increasing corporate earnings.
In a regular rebalanced portfolio, an investor is constantly adding out of favor assets while trimming expensive ones. Over time it will deliver superior risk adjusted returns. It just takes some courage and some patience. Obviously, a balanced portfolio approach did not perform on the absolute return level of the US equity indexes during 2013, although it did still reap above average returns that in any other year would certainly be considered stellar. Importantly, a balanced portfolio did perform well in 2012 and will most likely deliver once again in the coming year.
We wish you and your family good health and fortune in 2014.