2013 Turns Out to be a Great Year for Stocks

As 2013 came to a close, investors might have paused amidst the seasonal joviality to note the passing of a most remarkable year – one in which the stock market rally just kept going, undaunted even by the Fed’s pre-Christmas shift in policy.

It’s worth noting just how extraordinary the market performance has been. As the year was unfolding, many stock market commentators were too busy anticipating reactions that didn’t happen, and trying to second-guess the Federal Reserve Bank’s next moves to see what was happening. Here are the highlights:

• The Standard and Poor’s 500 Stock Index has returned 30.2 percent this year, including dividends. This will make 2013 the best year since 1991 if it continues at this level until Dec. 31.
• The market has experienced very little volatility. It began its upward path in 2010, and with the exception of a brief period in the spring of 2013, it continued on this trajectory. This type of pattern is very unusual. We’ve not had any precipitous declines – the type of volatility that is a normal part of the investing experience. (Though obviously not everyone invests in higher risk stocks.)
• Most analysts believe that the Federal Reserve’s quantitative easing program is directly linked to this unusually calm performance. Throughout the year, speculation as to whether the Fed was going to pare back this program has caused consternation regarding its possible effect on the markets. When the Fed finally did announce a tapering off of its bond purchases in December 2013, the immediate effect on the markets was negligible. Some market analysts and economists believe that in the longer term the Fed’s downshift will have an effect on market volatility.
• The Bureau of Economic Analysis issued new data at the end of December. BEA’s data shows the economy is growing and lends support to the timing of the Fed’s decision to taper off its asset purchasing program. The revised data shows that GDP actually grew at 4.1 percent in the third quarter – up from the previously estimated 3.6 percent. According to the BEA, the increase reflected investments in inventory by the private sector as well as gains in fixed investments, exports and non-federal government spending.

Indications suggest that this remarkable market performance is coming to a close, and that we’ll probably see a return to a more normal stock market in 2014. However, let’s not forget the achievements of 2013. In addition to another bullish year, we’ve seen economic growth increase and interest rates remain low. The future looks pretty rosy, too.

The commentary above is not intended to replace advice from your tax and investment professionals.

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