The resilient private sector buoyed the U.S. economy in 2013. The private sector performed well throughout the year, considering the drags from government spending cuts associated with the sequester and higher taxes associated with the fiscal cliff. We believe U.S. gross domestic product (GDP), which likely grew about 2% in 2013, would have grown modestly faster if not for these drags.
The stock market capped off a strong 2013 with double-digit gains in the fourth quarter (based on the S&P 500 Index). The strong finish to the year for stocks brought the index’s 2013 total return to a stellar 32.4%, the best calendar year performance since 1997. For the year, the boost to price-to-earnings (PE) multiples from improving investor sentiment, a first for the current bull market, was the biggest driver of stock market returns in a year of only mid-single-digit earnings growth.
The year 2013 was challenging for commodities, and this continued in the fourth quarter with gold suffering its biggest drop since 1981. The commodity markets broadly limped to the finish in 2013, as the Dow Jones-UBS Commodity Index fell 1.1% during the fourth quarter, bringing the loss for the year to 9.5%. Gold’s 28% decline, including a 9% fourth quarter loss, was the yellow metal’s first loss since 2000 and biggest loss in over 30 years amid anticipation of less stimulus from the Fed, low inflation, and the market’s rotation into riskier investments.
After suffering losses in the third quarter of 2013, the bond market stabilized during the fourth quarter with flat returns as the yield on the 10-year Treasury rose approximately 0.4%. That left the broad bond market, based on the Barclays Aggregate Bond Index, down 2.0% for the full year as the 10-year Treasury yield rose 1.3%. The rare annual loss for bonds was the second worst in the 40-year history of the Barclays Aggregate Bond Index, after the 2.9% loss in 1994.
An improving economy and the Federal Reserve helped drive strong stock market performance in 2013. As 2014 begins, LPL Financial Research believes the rally can continue, although gains this year may likely come with higher volatility than we experienced in 2013. Our 2014 outlook alls for better economic growth, which may lead to rising yields and flat bond market total returns. However, we see better growth leading to low double-digit stock market returns, driven by earnings per share for S&P 500 companies growing 5–10% and a rise in the PE ratio of about half a point from 16 to 16.5. The primary risk to our outlook is that better growth in the economy and profits do not develop.
I continue to seek out attractive investment opportunities, while remaining watchful for risks. As always, I encourage you to contact me if you have questions.
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. To determine which investments may be appropriate for you, consult me prior to investing. All performance referenced is historical and is no guarantee of future results
The Barclays Capital U.S. Aggregate Bond Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment-grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.
Past performance is no guarantee of future results.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Gross domestic product (GDP) is the market value of all officially recognized final goods and services produced within a country in a given period of time.
The Dow Jones-UBS Commodity Index (DJ-UBSCI) is a broadly diversified index that allows investors to track commodity futures through a single, simple measure.
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
International and emerging market investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices. The bigger the duration number, the greater the interest-rate risk or reward for bond prices.
Stock investing involves risk, including the risk of loss.
The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.
Precious metal investing is subject to substantial fluctuation and potential for loss.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price.
The P/E ratio (price to earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher P/E ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower P/E ratio.
This research material has been prepared by LPL Financial.