Fourth Quarter 2013 Market Review

A year ago today, investors were losing sleep over a number of issues that appeared to be legitimate concerns. Fortunately, almost none of these concerns materialized. There was no fiscal cliff, the U.S. did not default on its debt, Europe did not disintegrate, and while China’s growth slowed, there was clearly no hard landing.

The result was an outstanding year for the U.S. stock market. The S&P 500 posted its best gain (+32.39%) since 1997 and all ten economic sectors reported gains for the period. Growth stocks outperformed value stocks and that was especially evidenced by the modest returns earned by dividend yield stocks, many of which are found in the utility and telecommunication sectors.

Both of these sectors increased less than half as much as the S&P 500! The bond market struggled through most of the year as everything but savings rates and the lowest government rates moved higher. The Intermediate Government/Credit Bond Index declined 0.86% last year and the Aaa -A Rated Corporate Bond Index fell 1.94%. A legendary baseball coach once said “never make predictions, especially about the future.”

Having said this, we believe the economic outlook is good enough to support another positive year for stocks, despite the very strong gains the market has already achieved since 2009 and the current complacent mindset of investors. The latest survey shows that a 25 year low, 15% of market forecasters are bearish on the market. This is a contrary opinion indicator which currently suggests the market is due for a correction.

On the other hand, the economy should do better than 2013 as monetary stimulus continues and last year’s fiscal tightening from increased payroll taxes and the sequester lessens. Bottom line, any correction that might occur is not likely to reverse the market’s longer term uptrend.