Closing Prices 12/31/2013
S&P 500 INDEX.................................................
US TREASURY BOND
Current Yield - 10 year bond.................................................
US TREASURY BOND
Current Yield - 30 year bond.................................................
Past performance is no guarantee of future results and investing involves risk,
including the possible loss of principle.
The continuation of stable, global economic growth and a belief in extended
rosy market conditions led to a substantial melt up in equity markets at home
and abroad. Investors applauded the Federal Reserve's intention to slowly
reduce asset purchases while also altering the employment and inflation targets
before short-term interest will be raised. A bipartisan agreement, which eased
some Government spending cuts, offered hope that Washington will be less of
a deterrent going forward. Lower gas prices at the pump, a vivacious consumer
appetite and still affordable auto and mortgage loans were also causes for
optimism. Corporations have finally loosened their purses a bit as capital
expenditures are beginning to ramp up after years of extensive cost-cutting.
Incoming Fed Chief Janet Yellen is expected to be at least as dovish as her predecessor, further implying the Fed will do whatever it takes to avoid deflation and increase job growth.
For the quarter, the S&P with income advanced 10.5%, while the DJIA and Nasdaq rose 10.2% and 11.1%, respectively.
The impressive final three months added to the full year gains with the S&P 500, DJIA and Nasdaq up 32.4%, 29.7% and
40.1%, respectively. Smaller capitalization stocks outperformed with the Russell 2000 advancing 38.8% during the year.
International benchmarks posted solid gains, albeit at a fraction of our domestic economy. For the year, the StoxxEurope
600, DJ Asia-Pacific and Global Dow indices gained 17.4%, 10.3% and 24.5%, respectively. China and Brazil were
notable underperformers with the Shanghai Composite dropping 6.7% and the Sao Paulo Bovespa dropping 15.5%. Gold
saw its first annual decline in twelve years with a 28.6% drop while silver also fell 36.0%.
Investors have been relatively immune to negative returns in the fixed income arena for quite some time as rates declined
and prices rose. However, rates have been on the rise due to pending lower Fed purchases and a more stable growth
economy. On a year to date basis, losses were seen in the Barclays Capital Long-Term Treasury Index, Intermediate-
Term Index and Municipal Bond Index funds of 12.7%, 1.3% and 2.6%, respectively. With investors withdrawing funds
from fixed income areas and placing them in higher risk sectors, the rising interest rate trend could continue. We expect a
range of 2.7% to 3.7% for the upcoming year on the benchmark 10-year Treasury.
Benchmark returns of this magnitude are historically associated with accelerating GDP growth and robust jobs data.
As previously discussed, we are in a very sub-par growth period with annual rates around 2.5%, at best. The
number of jobs being produced each month has increased slowly, but they are low paying and exceedingly parttime.
The market has now bounced ~170% over the past 58 months. Ten-year Treasury rates have nearly doubled
from their lows in May. Price to earnings ratios are in the high teens. Real wages are barely budging. Corporate
profit margins are at all-time highs due to stock buybacks and cost cutting measures. IPO's are back to 2007 levels,
with many of them having negative earnings. Investor's bullishness is at levels that, historically, scream for caution.
There is a slight concern that the best case scenario may already be priced in, leading to more volatility in the
We continue to forecast sub-par, albeit improving economic growth for 2014 in the 2.5% - 2.8% area. The most
recent update to the third quarter GDP number was an impressive gain of 4.1%. This was led by consumer spending
in the gasoline and healthcare areas along with an inventory buildup. This probably takes some growth out of the
fourth quarter but we still project at least a 2.0% advance bringing the annual number to 2.5%. Historically, this
does not lead to large stock market advances such as this one. However, huge stock buybacks, a continued rise in
productivity and increased corporate leverage as they take advantage of the low interest rate arena have led to jumps
in net earnings. Going forward, it will be increasingly difficult on corporations to squeeze much more out of the
minimal top-line growth period we are currently in. Any deterrent to the slow and steady growth we expect could
wreak havoc on portfolio valuations.
If the recent past is any indication, the Fed's intention to begin tapering could lead to rising intermediate and
long-term interest rates while also added some volatility to the capital markets. We have not had a 10%
correction since the second quarter of 2012; an extended stretch to say the least. However, the Fed also
indicated the unemployment rate could go well under 6.5% before they start to raise short-term interest rates. A
steepened yield curve could be a boon to many companies. Future Federal Reserve actions combined with more
volatile interest rates are the main factors that can affect the markets over the coming months. The expanding
Fed balance sheet has been directly correlated to the rising stock market.
We are on much firmer footing since the recession began. Even though interest rates have been rising, it has
been slow and steady. Yields are still well below historic norms, which could result in housing momentum
continuing and small business loan growth picking up steam. Many prominent prognosticators are calling for
2.5% GDP or better in 2014, which would be a welcome sight. The United States remains the place to be for
technology, innovation and entrepreneurship which has led to a fracking boom, robotic industrial strength and
3D printing to name a few new areas of growth. Prices at the pump actually fell during the year which gives
consumers more cash to spend. Domestic equity inflows are at levels not seen in ten years, which was also a
precursor to further gains. Internationally, Europe has returned to growth, Japan looks to finally roar out of their
depression as the Nikkei advanced over 56% and emerging markets are benefitting from lower commodity
prices. Central banks around the world are increasingly accommodative as inflation subsides. A positive, albeit
more volatile, equity market can be expected unless there is a shock to the system in the form of spiking interest
rates, faster rising inflation or a geopolitical event.
We are in a decent, not overly bullish, phase of the economic cycle where there are still profits to be made.
However, there has not been a major correction in quite some time. The market is long overdue for a pause or
digestive phase. Balancing the positive short-term momentum with relatively extended valuations will be
critical for more gains in client portfolios. We will continue to book profits along the way. Having exposure to
companies with stronger balance sheets that generate excess cash which is returned to shareholders in the form
of dividends and stock buybacks should continue to be rewarded. Investors should stick to a shorter than
benchmark duration in order to protect principal in fixed income markets as well.
We appreciate your confidence and business. Please do not hesitate to call if you
have any questions or if we can be of assistance.
Your financial needs are our highest priority. To meet with a Wealth Management
Advisor, call or visit any of our Regional Offices.