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Fourth Quarter 2013 Market Summary



Economic & Financial Market Analysis

Fourth Quarter 2013


 

Q1 2013

Q2 2013

Q3 2013

Q4 2013

2013

S&P 500 TR USD

10.61%

2.91%

5.24%

10.51%

32.39%

DJ Industrial Average TR USD

11.93%

2.92%

2.12%

10.22%

29.65%

NASDAQ Composite PR USD

8.21%

4.15%

10.82%

10.74%

38.32%

Russell 1000 Value TR USD

12.31%

3.20%

3.94%

10.01%

32.53%

Russell 1000 Growth TR USD

9.54%

2.06%

8.11%

10.44%

33.48%

Russell 2000 Value TR USD

11.63%

2.47%

7.59%

9.30%

34.52%

Russell 2000 Growth TR USD

13.21%

3.74%

12.80%

8.17%

43.30%

MSCI EAFE NR USD

5.13%

-0.98%

11.56%

5.71%

22.78%

Barclays US Aggregate Bond TR USD

-0.12%

-2.32%

0.57%

-0.14%

-2.02%


2013 Review – A Year for Domestic Equities

Domestic Equities – As the above table reflects, 2013 was a great year for stock investors as all the major stock indices posted 20% plus returns with most indices closing the year at record high levels.  The year got off to a great start for stock investors and the momentum was only mildly interrupted throughout the year.  In fact, the S&P 500 Index was never in negative territory the entire year.  This was only the tenth time the S&P 500 Index has accomplished such a feat.  International equities, bonds, gold and alternative investment vehicles all underperformed relative to domestic stocks.

“Taper” – Much of 2013 was dedicated to the Federal Reserve and speculation around the possibility it would reduce open market bond purchases (“taper”) from the $85 billion per month level.  While Fed policymakers surprised most investors in September when they held off on a taper announcement, they ultimately decided to begin the process with a December announcement.  Equity markets in general reacted positively as investors focused on the positive economic data that led to the decision.


Interest Rates – For the first time since 1994, most bond investors lost money in their bond funds in 2013.  As speculation began to take hold that the Federal Reserve would reduce bond purchases, interest rates moved materially higher.  The yield on the benchmark 10-year U.S. Treasury rose from its 12/31/2012 level of 1.76% to end the year at 3.03%.  Given the negative correlation between bond prices and bond yields, bond investors suffered losses.


Economic Data – The year started with a Gross Domestic Product (GDP) report that reflected negative growth in the U.S. economy.  As 2013 progressed, GDP data gradually improved and finished the year with a 4% plus growth rate.  This positive trend in GDP growth coupled with improving employment data was the driving force behind the Federal Reserve’s decision to “taper” bond purchases in late 2013.         


Market Volatility – In 2013, equity markets experienced minimal volatility with only two pullbacks, in June and August, exceeding 3%.  The lack of volatility created limited buying opportunities for those sitting on cash.  This ultimately contributed to the year-end rally as those on the sidelines eventually added equity exposure.


Description: http://www.bespokeinvest.com/storage/2013%20change.png?__SQUARESPACE_CACHEVERSION=1388697553285


                                                            Source: Bespokeinvest.com

Fixed Income

The 10-year U.S. Treasury started the year with a yield of 1.76% and ended the year at 3.03%.  The rapid rise in interest rates created losses for most traditional bond investors as the benchmark Barclays U.S. Aggregate Bond Index lost 2.02% for the year.

Holding short duration bonds in our portfolios preserved capital in 2013, and this strategy will continue as the outlook for bond yields continue to point toward rising yields over the long-term.


Areas of Focus Going Forward

Corporate Earnings – Earnings reported during the final quarter of 2013 beat their generally low expectations.   As a growing economy takes hold, earnings expectations will be on the rise.  U.S. companies will need to deliver on the growing expectations in order to keep stock valuations moving higher.  Forward guidance from financial firms will be especially scrutinized as this sector has been one of the main drivers of the current rally.

The U.S. Economy – Economic statistics continue to improve, led in part by rapid improvements in the housing market.  Most economists view the current rate of rising home prices as unsustainable, and we should see much more modest improvements going forward.  Gross Domestic Product (GDP) growth over the last five years is still below the historic average of 3.0% (dating back to 1945) and is the reason the Fed will maintain its “zero interest rate policy” known as ZIRP for many months ahead.  The unemployment rate continues to improve, but it is still above the Federal Reserve target of 6.0%.


UNITED STATES UNEMPLOYMENT RATE

Percentage of the Labor Force



The Federal Reserve – Janet Yellen will take over Ben Bernanke’s position as Chairman of the Federal Reserve in February.  It is widely believed Yellen will continue along the same lines as Bernanke’s policies.  Any changes in policy will be monitored closely by investors.


U.S. Budget and Debt Ceiling Negotiations – Washington politics sparked the only corrections in equity markets during 2013.  Investors will again react negatively if Washington “shenanigans” take center stage in 2014.


The Foreign Factor – One notable development this year is Europe and Japan appear to be on the upswing.  Strong growth was recorded in their manufacturing, services, and construction sectors.  Their growth has helped U.S. markets accelerate exports and further improvements or deterioration will be closely monitored.

 

Investment Conclusions

Due to the fantastic 30% plus gains in the S&P 500 Index last year and a 170% rise in the market over the last five years, we feel it is prudent to initiate rebalancing in portfolios, and as a result, take some profits.  While we remain cautiously optimistic on stocks going forward (based in large part on the Federal Reserve likely keeping interest rates at or near zero for the foreseeable future), we are mindful that rebalancing prior to the 2000 and 2008 significant sell-offs served clients well.  The transition from a stock market supported by the Federal Reserve to a market supported by a healthy and robust economy will likely cause increased volatility, but the end result will be a stronger and more sustainable market for the long-term.

 


 

 

 

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