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Monthly Market Update - December 2013

Summary

The U.S. stock market punctuated an extraordinary year of gains with a 2.5% jump in the S&P 500 Index in December. Despite headlines of government shutdown, Federal Reserve tapering, and issues in Syria, 2013 will be highlighted as one of the golden years for investors. What makes the year even more remarkable was that nobody was predicting a strong year! The MSCI All Country World Stock Index rose 1.8% for the month and 23.6% for the year as a result of stronger demand and expansion in both the international and domestic markets. For diversified balanced investors, strong global stock returns in December and all of 2013 more than offset weaker performance in other markets including emerging markets, fixed income, and alternatives.

 

 

 

Economy

 

Final third-quarter U.S. economic growth (real GDP) came in at 4.1% — a sweeping advance from the second-quarter pace of 2.5%. Domestic growth has been increasing over the past few quarters which is a reflection of U.S. consumers and businesses continuing to regain strength.

 

Inflation (CPI) flat-lined in November, restrained by declines in gasoline and natural gas prices.

 

Job data was disappointing in December. The labor market participation reached its lowest point since 1978, which was a contributor to the unemployment level falling to 6.7%. Furthermore, employers hired the least number of workers in three years.

 

The Consumer Confidence Index climbed back up from 72.0 to 78.1 in December, attributable to a positive outlook on the U.S. economy and job prospects.

 

Lastly, the housing market ended the year on solid footing. Housing starts increased to a 1.09 million level, which will help keep pace with population growth and replacement housing.

 

 

 

U.S. Equity

 

The S&P 500 Index continued to blossom in December, adding 2.5% and advancing 32.4% for the year. The information technology and industrial sectors were the main drivers of growth for the month.

 

U.S. small-cap stocks (Russell 2000 Index) posted a return of 2.0% in December, lagging behind large-cap stocks. However, smallcap stocks are this year’s home run as the Russell 2000 ended up a whopping 38.8% in 2013!

 

 

 

International Equity

 

Developed international large-cap stocks (MSCI EAFE Index) came in just as strong in December, marking up a 1.5% return. This return was driven predominantly by the UK, Germany, and Sweden (up 2.7%, 2.8%, and 3.9% respectively). For the year, developed large-cap markets rose 22.8% in aggregate.

 

In contrast, emerging markets were hit hard by a strengthening U.S. dollar and weakening commodity prices. Emerging markets dropped 1.4% in the month and ended the year down 2.6%.

 

 

 

Fixed Income

 

The inevitable tapering of the Fed’s bond purchasing program finally began in December, with a drop from $85 billion to $75 billion per month. The 10-year Treasury bond yield took the news rather well, ending the year at 3.03%. Due to higher yields, most bond returns were slightly negative for the month while short-term bonds broke even.

 

The Barclays Aggregate Bond Index fell 2.0% in 2013 – an unexpected outcome. Negative years for bonds are rare and they are usually short-lived because lower bond prices are eventually offset by higher coupon income.

 

 

 

Alternatives

 

Commodities (DJ UBS Commodity Index) rose 1.2% in December, thanks to positive returns from the energy and industrial metals sectors. Precious metals, on the other hand, ended the year with a rough final month, dropping 3.7% and ending down 30.8% for the year (DJ UBS Precious Metals Index). Gold had an exceptionally rough year, but weakening gold prices are often a signal of a strengthening U.S. dollar and economy.

 

Global REITs (S&P Global REIT Index) weren’t hit as hard as commodities this year, dropping only 0.1% in December and ending down 0.7% for the year. REITs are sensitive to interest rates since they use debt to finance growth, so the prospect of higher rates has caused the market to decline this year.

 

 

 

Sources: Bureau of Economic Analysis (BEA), Federal Reserve, Institute for Supply Management, JP Morgan, Morningstar, JP Morgan, Standard and Poor’s, Wells Fargo, Yahoo! Finance

 

 

 

 

 

Market Returns - One Month as of 12/31/2013 

       

Market Returns - 3 Months as of 12/31/2013

 

 

 

Market Returns - One Year as of 12/31/2013

       

Source: Morningstar Direct. Indices used in above graphs: S&P 500 Index, U.S. Large Value-MSCI U.S. Prime Market Value Index, U.S. Small-Russell 2000 Index, U.S. Small Value-MSCI U.S. Small Value Index, Int'l Large-MSCI EAFE Index, Int'l Large Value-MSCI EAFE Value Index, Int'l Small-S&P EPAC Small Index, Int'l Small Value-S&P EPAC Small Value Index, Emerging Mkts-MSCI Emerging Markets Index, World Stock Index-MSCI All Country World IMI Index, TIPS-Barclays Gbl Infl Linked US TIPS Index, Short-Term Bonds-Ibbotson 1 Yr Treasury Const Mty Index, Interm-Term Bonds-Barclays Interm-Term Govt/Credit Index, Foreign Bonds-JPM GBI Global Ex US Hdg, Global REITs-S&P Global REIT Index, Commodities-DJ UBS Commodity Index.

Past performance is historical and does not guarantee or indicate future results. Index returns assume reinvestment of all distributions and unlike mutual funds, do not reflect fees or expenses. It is not possible to invest directly in an index. This report is not intended to provide personalized investment advice. Some information has been produced by unaffiliated third parties, and while it is deemed reliable, the advisor does not guarantee its accuracy or completeness.

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