Main BOS Logo

Quarterly Summaries

2013 Quarterly Summaries

prev next

Review of Securities Markets, Fourth Quarter, 2013

The fourth quarter capped a very strong year for stocks. Stocks in the U.S., as measured by the Standard and Poor’s 500, were up 32.4% in 2013, an astounding 173% higher than the bear‐market low set in March 2009. Small and value stocks, important tilts in our clients’ portfolios, were up even more than the broad market.

Foreign developed‐market stocks, as measured by the MSCI EAFE Index, were up only 23%, with gains in France, Germany, and Japan leading the way. Pro‐growth policies in Japan and relative stability in the Eurozone encouraged investors.

In contrast to the strong returns in developed country stock markets, emerging market stocks performed poorly in 2013 with the benchmark MSCI Emerging Markets index declining ‐2.3%. Rising interest rates in the U.S and other developed countries provided the catalyst for investors to withdraw capital from emerging economies. Additionally, weak commodity prices weighed on commodity exporters such as Brazil. Stocks in the U.S. and Europe were preferred, perceived to have an extra measure of safety.

One of the most closely followed stories this year was the Federal Reserve’s mid‐year announcement of potential “tapering”, a reduction of the $85 billion in monthly bond purchases intended to keep interest rates low and support growth in the U.S. economy. While the Fed indicated that the decision to reduce bond purchases was dependent on economic data, including a continuing recovery in employment, investors reacted by selling both stocks and bonds. As the year went on, investors became more accustomed to the idea of tapering and stocks resumed their ascent. Bonds stabilized at higher rates, creating small losses in the bond indexes. Interest‐rate sensitive investments such as real‐estate investment trusts experienced lower returns as well. The Fed’s decision to reduce bond purchases finally came in December, with a $10 billion monthly reduction slated for early 2014.

The Year In Review

In 2013, one of the biggest themes was the healing power of monetary policy, and central bankers did not disappoint. Accommodative monetary policy continued in much of the developed world, supporting economies that have experienced lackluster growth since the financial crisis. In the U.S., a closely‐ watched indicator of economic growth, Real Gross Domestic Product, increased at an annual pace of 4.1% in the third quarter, above the 50‐year average of 3.1% (J.P. Morgan data). On the other hand, the employment picture has been a stubborn source of frustration. While the headline figure is much improved at 6.7% unemployment in December, some of the gains have occurred because more people are dropping out of the workforce. The dropouts occur for reasons as simple as retirement, or as demoralizing as discouraging employment prospects, but the bottom line is that fewer Americans are working. According to the Labor Department, the labor force participation rate of 63% is a 36‐year low.

The threat of deflation continued to plague developed economies in 2013. Deflation is a decline in the general level of prices in an economy, typically triggered by weak demand for goods and services. As prices decline, consumers are inclined to wait for even lower prices before making purchases. For example, if I want to replace my aging Ford Fiesta but see that the price of a new car declined $1,000 this year, I might wait until next year, hoping the cost will decline even more. This delay in buying can lead to lower corporate earnings, the underpinning for stock valuations. In the U.S., the Fed’s preferred measure of prices, Personal Consumption Expenditures (PCE), excluding the volatile food and energy components, was up 0.9% for the 12 months ending in November, according to the Commerce Department. This figure is well below the Fed’s target of 2%.

Fiscal policy, particularly in the U.S., was less predictable than monetary policy. Congress gave us plenty of things to worry about, including sequestration (an automatic reduction in government spending that began in early 2013), the debt ceiling debate, and the budget standoff. Most analysts expect that these fiscal policy missteps caused some reduction in U.S. economic growth in 2013; however, that figure was difficult to quantify.

It is remarkable that the U.S., a sovereign nation with reserve currency status that is able to meet its financial commitments, would allow the world to perceive that it may refuse to pay its bills, as happened this year with the budget debate. This stands in stark contrast to many of the peripheral European countries that would be unable to pay without the creative financing techniques backed by the European Central Bank (ECB). Leaders of the European Central Bank have assured investors that they will do whatever it takes to honor the financial obligations of Eurozone members, despite the fundamental inability to service debt. In addition to the ECB’s do‐whatever‐it‐takes attitude, a reversal of the hardline austerity measures imposed early in the financial crisis created a more tranquil investing environment in Europe. While it is easy to be lulled to sleep in this period of relative calm, the financial problems in Europe have not been solved and are likely to be a source of lingering uncertainty for years to come.

Economies in the emerging world faced many challenges in 2013. First, with meager growth in the rest of the world, developing economies have not had sufficient demand for goods produced for export. In addition, manufacturers in Japan have benefited from a weaker yen, making their high‐quality goods less expensive on the world stage. Third, Europe has consumed less over the past few years as consumers work through the ramifications of the sovereign debt crisis. All of these influences create a vicious cycle for emerging economies, one that can be broken with a broad‐based global economic recovery. Without substantial demand for exports, emerging economies cannot create the jobs necessary to develop their own middle classes. Without the rapid development of their own consumers, emerging economies must continue to rely on foreigners to import goods. With this cycle firmly entrenched, emerging economies could continue to suffer uneven growth, erratic capital flows, and ongoing social turmoil. With the International Monetary Fund predicting global growth of 3.6% in 2014, still below the preferred rate of 4%, the expansion of a global middle class could continue to struggle.

There is plenty to consider as we look ahead to 2014, but that uncertainty is always a part of the investing landscape. Maintaining a diversified portfolio with an appropriate risk level can eliminate the need to time the market, which, as history shows, is very difficult to do consistently. Capturing gains and containing losses within a well‐diversified portfolio can give investors what we believe is the best shot at achieving long‐term financial success.

Written by Colleen S. Supran, CFA, Principal; [email protected]

Key Economic Indicators

  • At its meeting in October, the Federal Reserve Open Market Committee agreed to continue holding the target range for the federal funds rate at 0% to 0.25%. The Committee saw improvement in economic activity and labor market conditions, and later agreed to reduce the pace of its purchase of Treasury and mortgage‐backed securities modestly, by a total of $10 billion per month.
  • The U.S. unemployment rate declined to 6.7% in December. The number of long‐term unemployed accounts for 37.3% of the total unemployed.
  • Standard & Poor’s 500 Index operating earnings per share for the third quarter of 2013 increased 2.1% over second quarter earnings. Earnings increased 12.1% from the same quarter last year. Analysts are expecting continued earnings growth for the fourth quarter of 2013.
  • US non‐farm worker productivity increased at an annual rate of 3.0% during the third quarter of 2013. This gain reflects increases of 4.7% in output and 1.7% in hours worked.
  • The Comex spot rate for gold declined by 9.64% in the fourth quarter of 2013, closing at $1,202.30 per ounce. The strengthening dollar, increasing interest rates, and a general healing of global economies in 2013 did not bode well for gold prices. Gold declined by 28.3% for the year to its lowest annual return since 1981.
  • U.S. crude oil prices dropped 3.5% in the fourth quarter of 2013 due to an ample supply and stabilization in demand. Oil closed at $98.70. Return for the calendar year was 7.53%.

    Key economic indicators compiled by Barbara A. Ziontz, CFP, Portfolio Manager; [email protected]

Quarterly Review of Securities Markets: Total Returns

IndexMarketLast 3 Months (10/01/13 – 12/31/13)Year-to-Date as of 12/31/2013
Standard & Poor’s 500Large Co. U.S. Stocks10.51%32.41%
Russell 1000 ValueLarge Co. Value U.S. Stocks10.01%32.53%
Russell 2000Small Co. U.S. Stocks8.72%38.82%
Russell 2000 ValueSmall Co. Value U.S. Stocks9.30%34.52%
FTSE NAREIT Equity REITReal Estate Investment‐0.17%2.86%
NASDAQ 100Technology Stocks11.62%34.99%
MSCI EAFE1Foreign Stocks5.71%22.78%
Barclays Capital AggregateU.S. Dollar Bonds‐0.14%‐2.02%
Barclays Capital MunicipalMunicipal Bonds0.33%‐2.55%
Merrill Global Gov’t BondGlobal Bonds‐2.24%‐6.79%


Source: Thomson Financial’s Investment View

Data Sources: The Wall Street Journal; US Dept. of Commerce ‐ Bureau of Economic Analysis; US Dept. of Labor;;;;;;;; Dimensional Fund Advisors

Disclosures and Footnotes:

This information is not intended to be used as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any client’s account should or would be handled, as appropriate investment strategies depend upon the client’s investment objectives. It is the responsibility of any person or persons in possession of this material to inform themselves of and to take appropriate advice regarding any applicable legal requirements and any applicable taxation regulations which might be relevant to the subscription, purchase, holding, exchange, redemption or disposal of any investments.

This information does not constitute a solicitation in any jurisdiction in which such a solicitation is unlawful or to any person to whom it is unlawful. Moreover, this information neither constitutes an offer to enter into an investment agreement with the recipient of this document nor an invitation to respond to the document by making an offer to enter into an investment agreement.

The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk. Past performance is not indicative of future results, which may vary. The value of investments and the income derived from investments can go down as well as up. Future returns are not guaranteed, and a loss of principal may occur.

Opinions expressed are current opinions as of the date appearing in this material only. No part of this material may, without Bingham, Osborn & Scarborough, LLC’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient.

(1) Source: MSCI. Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties or originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.

©2013 Bingham, Osborn & Scarborough, LLC


Get B|O|S Perspectives
in Your Inbox