Quarterly Recap - 4th Quarter 2013

U.S. stocks ended a banner year with the Dow Industrials and S&P 500 closing at new all-time highs. Markets were strong throughout the month and quarter as improving labor market conditions and better-than-expected economic growth finally provided the Federal Reserve with sufficient evidence to reduce its monthly asset purchase program known as quantitative easing. On December 18th, Fed policymakers said the economy was strong enough to taper its $85B monthly bond purchases by $10B. The central bank also revealed that as conditions warrant, it will make similar reductions over the course of 2014 and end stimulus altogether by the end of the year. All told, together with improving corporate earnings, quantitative easing programs by the U.S. Fed, the European Central Bank and the Bank of Japan have helped boost global equity valuations by over $9.5 trillion this year. The S&P 500 returned 2.5% in December, extended quarterly gains to 10.5% and concluded the year with its best annual gain since 1997.

Smaller capitalized U.S. companies underperformed large-cap stocks as the Russell 2000 Index, a proxy of small-cap equity performance, rose 2% in December and rallied 8.7% during the quarter. Yet for the year, small-cap beat large-cap as the Russell 2000 surged 38.8%. Growth stocks edged out value in all three periods as the Russell 1000 Growth Index rose 2.9% last month whereas the Russell 1000 Value Index returned 2.5%. During the quarter and year, the Russell 1000 Growth Index advanced 10.4% and 33.5% respectively, while the Russell 1000 Value Index gained 10% and 32.5%. All but one of the ten major sectors rallied in December with Materials (+4.8%) and Industrials (+4.3%) gaining the most, while Telecom (-0.3%) fell. For the quarter, Industrials (+13.5%) and Technology (+13.3%) took top honors. Consumer Discretionary (+43.1%) and Healthcare (+41.5%) were 2013’s top performing sectors.

Developed markets outside the U.S. and Canada, as measured by the MSCI EAFE Index, widely underperformed domestic indices during the month (+1.5%) and quarter (+5.7%). Emerging markets, as measured by the MSCI Emerging Market Index, rebounded to post a 1.5% December gain after falling 1.5% in November. Emerging markets rose 1.8% on a quarterly basis, paring its 2013 loss to 2.6%. Commodities, as measured by the S&P GSCI Index of 24 raw materials, registered its first annual loss in five years (-1.2%). Gold plunged by nearly $470/oz. (-28%) in 2013, its worst annual decline in 32 years. Silver plunged 32% last year. Crude oil futures rose 6.1% in December, fell 3.8% during the 4Q and rose 7.2% on the year.

In the bond market, the Barclays U.S. Government Bond Index lost 0.9% in December, fell 0.7% during the fourth quarter and posted its first annual loss since 2009 (-2.6%). The yield on benchmark 10-year U.S. Treasury notes ended the quarter at 3.03%, up 39 basis points from the start of the quarter and up 127 basis points on the year. At the other end of the credit quality spectrum, non-investment grade corporate bonds returned 0.5% in December, 3.6% on the quarter and 7.4% for the year, as measured by the Barclays U.S. Corporate High Yield Index. Higher quality investment grade bonds, as measured by the Barclays U.S. Aggregate Bond Index, fell 0.6% on the month, slipped 0.1% during the quarter and lost 2% in 2013. The Barclays Municipals Index fell 0.3% in December, gained 0.3% during the quarter and fell 2.6% last year.

1. Morningstar Direct (all performance percentages are total return based, which include reinvested dividend, interest)
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