2013 was a darn good year in the markets. Leadership can be found right in our backyard as U.S. stocks performed very well. The S&P 500 total return (including dividends) was up 32.4% as of the market close on 12/31/13. Looking at the economy, Dow Jones News reported the latest real Gross Domestic Product (GDP) results for 3rd quarter 2013 came in surprisingly strong at 4.1% and the unemployment rate fell to 7.0% in November (more on these numbers a little later). Consumers continue to show confidence through their spending habits as evidenced by credit purchases increasing $18 billion in October. New home sales, which are very interest rate sensitive, got a boost last month (November) as buyers might be feeling an end to extremely low rates is on the way and “locked” in a rate before further increases (the 10-year Treasury ended the year at 3.03% - up from 1.76% at the end of 2012). 

Summary:

• U.S. Markets are at all-time highs
• Valuations on these markets continue to reflect “fair” prices – not extreme levels
• Corporate Earnings remain strong (supports market levels)
• Federal Reserve Quantitative Easing (QE3) – the first sign of tapering announced yesterday
• GDP and Employment are Improving
• Inflation still low

Market Details:

As we close the year and begin to look forward, it would be hard to predict a year as strong as 2013. That said, Fidelity recently ran a summary of valuation metrics on the S&P 500 which concluded that 14 out of 15 measurements were below prior market highs reached in 2000 and 2007. Corporate earnings are at record highs and that is substantiating where the market is currently trading. Additionally, reported cash levels held in mutual funds and both Corporate and individual investor accounts are still very high indicating there is room to put these funds to work in the markets. We also see Europe as slowly coming out of their second recession in the last 5 years. While this is likely to be an extremely slow recovery, there are signs of improvement in their economies that should help maintain global growth. 

The Fed and “Tapering”:

As we close the year and begin to look forward, it would be hard to predict a year as strong as 2013. That said, Fidelity recently ran a summary of valuation metrics on the S&P 500 which concluded that 14 out of 15 measurements were below prior market highs reached in 2000 and 2007. Corporate earnings are at record highs and that is substantiating where the market is currently trading. Additionally, reported cash levels held in mutual funds and both Corporate and individual investor accounts are still very high indicating there is room to put these funds to work in the markets. We also see Europe as slowly coming out of their second recession in the last 5 years. While this is likely to be an extremely slow recovery, there are signs of improvement in their economies that should help maintain global growth.

Employment:

Although the economy is improving, for many Americans this improvement is not being felt. At 7% unemployment, down from over 10% at the recession peak, we are far from what is considered “full” employment generally thought to be 5% unemployed. The Dept. of Labor estimates that 4.1 million people have been out of work for over 27 weeks and may soon lose benefits as a result of the Federal budget that was recently passed by both the House and Senate. As a result, it is likely that these people will effectively drop out of the labor force participation rate, which is then estimated to fall to 62.8% - further discouraging job seekers. The participation rate has been steadily falling since the start of the recession in 2008 (66% to 63.6% as of the November reading) and this has certainly been a factor in the improving unemployment rate. The good news here is that over 7 million new jobs have been created since the recession ended and the last 3 months of reported payroll growth has topped 200,000 which is a positive trend.

Conclusion:

There is a lot to consider whenever we see unexpected market returns like we’ve had in 2013. It appears that fundamentals support current market prices and there is a general economic improvement being felt around the world. Putting the information we have together, we believe that we are leaning toward a positive market return in 2014 but not as strong as 2013. We think interest rates will continue rising but likely at a slower pace and, in our opinion, we expect employment to improve and GDP growth of 2.5% would be reasonable.  

If you have any questions, please feel free to call our Wealth Strategies Group at 585-419-0670.