John Gorlow
| Jan 13, 2014
Year-End Review
The amazing performance of US stocks in 2013 was a welcome surprise for investors who are following a simple buy-and-hold strategy and a source of exasperation for many professionals caught flatfooted by the steady rise in share prices.
It was the best year for the S&P 500 Index since 1997, with a total return in excess of 32%. The NASDAQ Composite Index gained 40.14% and the Russell 2000, a popular benchmark for small company US stocks, returned 38.82%, its biggest gain since 1993. The stock market’s strong performance came with lower volatility, as gauged by the VIX, which fell for the second straight year to reach its lowest level since 2006.
To some experts, it was another year "Waiting for Godot". A Barron’s cover story appearing in November 2012 warned investors to “get ready for the recession of 2013.” The title of a Time article on the outlook for financial markets that same month shouted, “Why Stocks Are Dead” in oversize type. A prominent economic forecaster who predicted the downturn in 2008 suggested that four elements—stagnating US economic growth, the European debt crisis, a slump in emerging markets, and military conflict in the Middle East—could combine and lead to a “super-storm.” Others fretted about a deepening slump in China that could drag the rest of the world down with it".
What can investors learn from this year’s market behavior? Most of us accept the idea that predicting the future is difficult. And predicting how other investors will respond to unpredictable events is harder still. Yet, for some, the temptation to engage in such efforts is irresistible. No doubt there are plenty of risks for bears to feast on in 2014. However, results from this past year remind us to be skeptical of our ability—or anyone else’s—to make predictions well enough to outperform a diversified, passively structured and cost-efficient, long-term buy-and-hold strategy. (Surprise! No Selloff in 2013, January 2014, Weston Wellington, DFA)
In the non-US developed markets, the MSCI-EAFE Index returned 22.78%, and all developed country markets in the MSCI indexes had positive returns. Emerging markets were the exception to the worldwide equity advance, as returns in many emerging countries turned negative, with the MSCI Emerging Markets Index returning -2.60% for the year.
The major world currencies were mixed relative to the US dollar. The euro gained 4.3% against the dollar—reaching a two-year high. The British pound gained 2% against the dollar. The Japanese yen experienced the biggest loss against the US dollar (21%) due to a combination of aggressive monetary easing and increased government spending. The Australian dollar gave up about 14% of its value against the US dollar.
Returns of major fixed income indexes were either mixed or negative due to rising rates. One-year US Treasury Notes returned 0.25%; US government bonds -2.60%; world government bonds (1–5 years USD hedged) returned 0.62%; US TIPS returned -8.61%; and Municipal Bonds returned -2.55%.
Real estate securities had a relatively lackluster year: The Dow Jones US Select REIT Index returned 1.22% and S&P Global ex US REIT Index 2.36%. Commodities were negative for the third straight year, with the Dow Jones-UBS Commodity Index returning -9.52%. Within the index, gold returned -28.65% and silver -36.63%.