2013 was the Year of Unstoppable Stocks
The stock market was unstoppable in 2013.
A U.S. government shutdown, fear of a default, the threat of military action in Syria, big budget cuts, and a European country looking for a bailout - any number of events might have derailed the stock market. But they didn’t.
And if skittish investors jumped out of stocks, they lost out.
"2013 would have been good year to wear noise-cancelling headphones," says Dean Junkans, chief investment officer for Wells Fargo Private Bank. "There were a lot of things that happened and the market kept moving higher."
The Standard & Poor’s 500 had its best year since 1997, ending up 29.6 percent. The Dow Jones industrial average also turned in a stellar performance: It closed up 26.5 percent, its best gain since 1995. Combined, the two indexes closed at record highs on 97 occasions.
Instead of worrying about the wider world, investors focused on the Federal Reserve and the outlook for its stimulus program.
The Fed bought $85 billion in government bonds each month in 2013. The purchases were designed to hold down long-term borrowing rates and encourage spending and investment. The stimulus also prodded investors to move from low-yielding bonds to stocks.
Investors reacted to every twist and turn of the program’s fate. They sold stocks in the spring and summer over fears the central bank would slow its bond-buying prematurely. They worried that every bit of good economic news signaled the end of support. But in December, as hiring grew consistently stronger, investors were confident enough in the economy that they reacted positively when Fed officials finally decided to dial back purchases. The Fed also reassured the market by signaling it would keep short-term rates near zero. The stock market, which had hovered below all-time highs, returned to record territory.
Of course, it wasn’t all about the Fed. Companies also played a part.
Despite a middling economy, U.S. corporate earnings rose for a fourth straight year. Total earnings for S&P 500 companies in 2013 are forecast to increase 5.37 percent to a record $109.03 a share, according to data from S&P Capital IQ.
"It’s tough to argue that companies are in anything other than good health," says Paul Atkinson, head of North American equities at Aberdeen Asset Management, a global fund management company that oversees about $325 billion.
Investors, emboldened by the Fed’s support and low inflation, were willing to pay more for those earnings. The price-earnings ratio for the S&P 500 index, a measure of earnings compared with stock prices, rose to 15.4 from 12.6 at the start of 2013, according to FactSet data. By that measure, stocks grew more expensive, but weren’t necessarily overvalued. The P/E ratio remained below its 20-year average of 16.5.
Here are 10 lessons from the year of the bull:
SMALL COMPANIES CAN GIVE BIG RETURNS
Some of the best performers of the year weren’t the big blue-chip stocks, but smaller ones. The Russell 2000, an index that tracks small stocks, rose 37 percent, more than the Dow and the S&P 500. Smaller companies are more focused on the United States than larger multi-national corporations. That means they benefit more when the U.S. grows faster than other parts of the world, such as Europe. That’s exactly what happened in 2013.
THE BOND PARTY IS OVER
Yes, they were safe, but with 10-year Treasury notes paying interest below 3 percent for most of the year, bonds weren’t sexy. From 1981 to 2012, government and company bonds rose 35 percent, according to the Barclays Capital U.S. Aggregate Bond Index, a broad measure of the debt market. In 2013, bonds in the index handed investors a loss of 2 percent, the first since 1999.
As the economy improves, many investors believe that interest rates will continue to rise and bonds will only fall further.
DON’T WAIT FOR THE DIPS
Even with all the unsettling headlines, 2013’s stock surge was achieved without a significant wobble. The S&P 500 has gone 27 months - since Oct. 3, 2011 - without a correction, defined as a drop of 10 percent or more. That compares with an average streak of 18 months between such declines, according to S&P Capital IQ.
Investors who sat out the rally in stocks are left with a quandary: Do they buy now that stocks have become more expensive, or do they stay on the sidelines, waiting for a dip, and risk being left further behind?
A STOCK RALLY DOESN’T NEED TO BE LOVED
Signs of euphoria were largely absent from the stock market, despite the big gains. In fact, the market seemed out of step with a fragile economy.
The pace of mergers and acquisitions lagged as executives remained unwilling to strike large deals amid uncertainty about the economy. Corporate profits rose, but largely due to cost-cutting, not higher sales. Hiring picked up, but at a sluggish pace.
"I’ve never seen a near 30-percent year where investors are so unhappy," says Jonathan Golub, chief U.S. market strategist at RBC Capital Markets.