Current Thinking

4th Quarter 2013 Economic & Market Review

Economy
The Federal Reserve’s December announcement of modest tapering forthcoming in 2014 did little to lessen investors’ affection for equities. Bond investors especially those at the long-end of the curve, however, continued to squirm. Real Estate investors were likely disappointed after returns fell short of historical norms (S&P US REIT Index, -0.7% 4th Quarter “4Q”; +2.4% Year-to-date “YTD”).

Equity Markets
US Equity markets broke nicely from the gate in 2013 (S&P 500 Index, +10.6% 1Q) and finished in robust fashion down the stretch (S&P 500 Index, +10.5% 4Q) for a handsome 12-month pace of 32.4%, such prowess had not been seen since a 33.4% return posted in 1997.

Overseas investors were invited to the party as well, afforded a 4Q return of 5.7% and a YTD total of 22.8% through the MSCI EAFE Index. Emerging markets attempted to play the role of spoiler limping through 4Q with a return of 1.8% (MSCI Emerging Markets Index) whilst tumbling 2.6% for the YTD.

US mid-caps (+8.4% 4Q) and small-caps (+8.7% 4Q) trailed their large-cap brethren for the quarter, but outpaced for the YTD (Russell Midcap Index, +34.8%; Russell 2000 Index, +38.8%). There was little differentiation amongst investment styles, for either the quarter or year with the exception of small cap growth stocks outperforming their value counter-parts by 8.8% for the YTD.

Fixed-Income Markets
All was not rosy for the nearly capsizing bond market. The Barclays US Aggregate lost 0.1% for the quarter, sinking 2.0% for the YTD. While long credits managed to stay afloat for the quarter (+1.5%) they too finished underwater for the YTD (Barclays US Aggregate Credit Long, -6.6%). Yet the darkest depths were reached by long treasuries which retracted 3.1% for the quarter and touched bottom for the year (Barclays US Aggregate Gov’t Treasury Long Index, -12.7% YTD).