A Year To Remember

January 22, 2014

The U.S. stock market punctuated an extraordinary year with gains on the last trading day, moving many of the American indexes to record highs on the final trading day for only the sixth time in history.  Despite all the uncertainties that we faced, people will look back at 2013 as one of the most profitable years for investors on record.

The Wilshire 5000 index–the broadest measure of U.S. stocks and bonds–rose 33.07% in calendar 2013.  The S&P 500 index of large company stocks gained 29.60% in 2013.  The Dow Jones Industrial Average finished the year up 26.5%, it’s best year since 1995.

By any measure, these returns were remarkable. What makes the year even more remarkable was that nobody was predicting a rampaging bull market in 2013.  So the real question remains, is this a bull market?  Commentators, investment strategists and economists don’t agree on whether we are experiencing a temporary rise in the midst of a long-term bear market, like we experienced during the Great Depression, or the strong early stirrings of a long-term bull like the one which started in 1982.  The truth is, nobody knows.

Around the world, the results were mostly excellent in 2013, even though returns lagged the booming U.S. market.  The broad-based EAFE index of developed economies rose 19.43% in dollar terms in 2013.  European stocks were up 21.68%, giving them a strong year despite the constant threats of sovereign debt default and internal trade imbalances. Emerging market stocks were a very different story.  In 2013, the EAFE Emerging Markets index of stocks was down 4.98% for the year.

In fixed income, bond yields remain low by historical standards, but a slow rise in rates caused bond holders to experience paper losses.  Investors in the Barclay’s Global Aggregate bond index lost 2.60% in 2013, and 2.02% in the U.S. Aggregate index.

So why are many American’s still wary of the economy?  One possible reason why so many investors remain nervous about stocks is the erroneous belief that the U.S. economy is still mired in a recession.  You hear words like “sluggish” in the press, but in fact, the total output of the American economy has grown steadily since the 2008 meltdown.  The Bureau of Economic Analysis statistics show an annualized increase of 4.1% in the third quarter of last year, following a 2.5% rise in the second quarter.

Other economic signs are also encouraging.  Individuals and corporations are carrying less debt than in the past. In real estate, U.S. home prices recently posted their largest one-month rise in more than seven years, and some markets have seen housing values reach their pre-recession levels.

Even so, many investors will continue to wait on the sidelines, looking for “proof” that the market recovery is finally for real, while others will keep their money from working on their behalf in expectation of a crash.  The former will finally get back in when prices have peaked, and will, in fact, be our most reliable indicator that the market has become overvalued.  The latter will miss the next downturn, but also lose out on the positive returns that have, historically, outweighed the losses suffered in bear markets.  The past five years have given us a useful lesson: the benefit comes to the long-term investor that plants seeds with the expectation that there will be bad periods from time to time.  But if there’s one thing we can learn from history, it’s that the good years tend to outnumber the bad years. And the chance to participate in these unexpected booming years will more than make up for the losses.

Article written by Bob Veres of Inside Information

Sources:

Wilshire index data: http://www.wilshire.com/Indexes/calculator/

S&P index data: http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf–p-us-l–

International indices: http://www.mscibarra.com/products/indices/international_equity_indices/performance.html

Aggregate corporate bond rates: http://www.bloomberg.com/markets/rates-bonds/corporate-bonds/

GDP growth and corporate profits: http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

Debt to GDP ratios: http://en.wikipedia.org/wiki/Economy_of_the_United_States

Housing prices: http://therealdeal.com/blog/2013/12/31/u-s-home-prices-see-biggest-jump-in-seven-years/

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