Investment Year in Review 2013

by Jan 15, 2014Investment Consulting

Global stocks as a whole were up sharply in 2013. Performance differed significantly by geography and company size with domestic large, mid, and small company stocks all up more than 30%. In contrast, emerging market stocks declined 2.6%.

Large daily price swings were relatively absent from the stock market during the year. In fact, there were only two days during calendar year 2013 where global stocks rose or fell more than 2%. This stands in sharp contrast to the large number of daily swings experienced during the 2008 through 2011 time period.

In the bond market, rising interest rates led to negative returns for most bonds in 2013. Investment grade U.S. bonds as a whole fell 2% during the year but varied within the category. Riskier, non-core bonds varied: floating and fixed rate high yield bonds rose in excess of 5%, while emerging market bonds fell in excess of 5%.

Major asset class returns.

  

Q4

2013

Core Bonds

(BarCap U.S. Agg)

-.1%

-2.0%

Global Stocks (as a whole)

(MSCI AC World)

7.3%

22.8%

U.S. Large Stocks

(S&P 500)

10.5%

32.4%

U.S. Mid Stocks

(Russell Mid Cap)

8.4%

34.8%

U.S. Small Stocks

(Russell 2000)

8.72%

38.8%

Foreign Developed Stocks

(MSCI EAFE)

5.7%

22.8%

Emerging Market Stocks

(MSCI EM)

1.8%

-2.6%

Commodities

(DJ UBS Comm)

-1.1%

-9.5%

Real Estate

(DJ REIT)

-1.1%

1.2%

U.S. labor market update.

Over the past few years the unemployment rate has fallen from a double digit level to less than 7%. At the same time, the employment rate has remained virtually unchanged. With baby boomers beginning to retire and discouraged workers leaving the labor force, a smaller portion of the population is responsible for growing the U.S. economy. When combined with low wage growth, it is unlikely that the Federal Reserve will raise short term interest rates any time soon.

Central bank intervention.

In hopes of determining the central bank’s next move, market participants listened with interest to every speech members of the Federal Reserve’s Board of Governors made. As a result, longer term interest rates went up and down throughout the year as economists, strategists, and bond traders interpreted conflicting statements. Finally, after months of speculation and an accompanying general rise in longer term interest rates, the Federal Reserve announced that it was ready to begin reducing monthly asset purchases.

With short term interest rates held near zero and a growing balance sheet that now exceeds $4 trillion, the Federal Reserve continues to inject monetary stimulus in hopes of making broader financial conditions more favorable. With Ben Bernanke leaving the Federal Reserve this January, the responsibility of unwinding this unprecedented level of monetary stimulus will fall on Chairman Janet Yellen and her fellow Fed Governors in 2014 and beyond.

Domestic economic growth.

Real final sales of domestic product, which exclude the change in inventories, have increased approximately 2% on average over the past several quarters. While 2% expansion is a slower pace than economists and central bankers would like, the domestic economy has now expanded for 10 straight quarters.

Although the strengthening U.S. dollar made imports less expensive and exports more expensive, net imports (total imports less total exports) decreased in 2013. A key component to this beneficial development was the rise in domestic energy production.

Washington removed some uncertainty.

Politicians in Washington removed some uncertainty for investors by passing a spending bill for fiscal year 2014 and removing the threat of another government shutdown in early 2014. This bill, The Bipartisan Budget Act of 2013, also provides clarity on spending levels for current government programs as well as the department of defense.