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Q4 2013 Capital Markets Update
Last Updated: January 17, 2014
As central banks continued with easy monetary policy and fears of the Federal Reserve reducing its asset purchases subsided throughout most of the year, stock and bond markets continued their uptick during 2013. Both domestic and international equity markets increased from 2012 levels. Bond markets (with the exception of high yield or “junk” bonds) ended in negative territory over concerns that interest rates are poised to increase from current levels.
For the year ending December 31, 2013, the Dow Jones Industrial Average finished up 29.65%, compared to an increase of 10.24% over 2012. The broader S&P 500 Index posted gains of 32.39% for 2013, compared to an increase of 16.00% for 2012. International stock markets gains were smaller, reflecting investor caution that the economic situation would improve in Europe as well as globally. The MSCI EAFE (Europe, Australasia, Far-East) Index posted a 22.77% return for 2013, compared to an increase of 17.33% for 2012.
Fixed income markets remained muted during 2013 due to concerns that tapering by the Federal Reserve will become a bigger issue in 2014. The broad-based Barclays U.S. Aggregate Bond Index returned -2.02% for 2013 compared to 4.22% in 2012. Riskier bonds, as measured by the ML US High Yield Master II Index, had returns of 7.42% for 2013 compared to 15.59% for 2012. The more conservative US 10-year Treasury Bill index posted a return -7.64% for 2013 compared to 6.05% for 2012, as bond investors looked for riskier alternatives that offered more attractive yields.
The strength of the equity markets in 2013 was largely fueled by easy monetary policy by the Fed, and investor appetite for risk. Many companies improved profitability and earnings in 2013 by cutting costs. With productivity of employees at all-time highs, and continued pressure on profitability of companies with new laws and regulations, it’s likely that companies will face headwinds in growing sales during the coming year. Given the recent run-up in equity prices, the markets may witness some volatility early on as companies re-assess their growth outlooks during the first quarter of 2014.
It is critical to have the appropriate mix of stock, bond, and cash investments based on time to retirement, risk tolerance, and return expectations. Investors should conduct regular reviews of portfolios to make sure allocations have not gotten out of balance as a result of recent market movements. By diversifying across asset classes, investors have exposure to investments that provide growth, income, and preservation of capital (liquidity) through various economic cycles.
Please contact a Pension Consultants Investment Consultant at 800-234-9584 for additional information.
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