Glancing Back as We Move Forward - 2013 in Review
Throughout 2013 the “wall of worry” was constantly reinforced issue by issue, yet the US equity markets performed strongly, unemployment fell to its lowest rate in five years, and the US trade deficit shrank to its lowest level in four years.
For the year, the S&P 500 index (IVV)* produced a final annual return of +32.39%. The International Equity Index (MSCI EAFE)* finished with a return of +22.78%, while the Emerging Markets Index (MSCI EEM)* returned -2.60%. The Barclays Capital Aggregate Bond Index (AGG)* finished with a return of -2.02%.
Domestically, the year started with a “government crisis” and a “fiscal cliff” stand-off in Washington. The spotlight remained on the short-comings of the Capital with a messy Affordable Care Act roll-out. Detroit filed for bankruptcy and “Taper” entered into the investing lexicon as a flashpoint word that the financial markets listened carefully for the Federal Reserve to use.
Further afield, political problems in Europe continued, and within the always-volatile Middle East, Syria’s civil war became an international crisis. Yet, in spite of the uncertainty both here and abroad, the U.S. economy continued strengthening.
On December 18th, 2013, the Federal Reserve announced a tapering of its Quantitative Easing program. Although Chairman Bernanke telegraphed this pending event back in June, immediately creating a short-lived market sell-off with the news, it appears investors are concluding life will go on without the Fed priming the pump as much. Emphasis here being on “as much” because the Fed is not applying the brakes to the program; instead, they are only easing their foot off the accelerator. Bernanke viewed the 7% unemployment objective as a target to be reached before considering tapering. That has now been attained, and it appears that the Fed Board is comfortable easing back slowly from their previous monthly bond purchases of $85 billion to a more modest $75 billion. (It is anticipated that the Fed will reduce its purchase program by $10 billion month by month.) A by-product of the Fed tapering its buying program will likely be a strengthening of the US dollar against other global currencies.
On January 6th, 2014, Janet Yellen became the next chairperson of the Federal Reserve, the first woman to take over that role in the 100-year history of the U.S. banking system. Recognized as at least as dovish (accommodative) as her predecessor, she has already clarified that reducing US unemployment rates remains a key metric for her and the Fed committee, and opinion is that she will be comfortable helping the economy by continuing Fed intervention.
Interest rates remain low. Even though the Fed Funds rate remains at 0.25%, consensus is that inflation is not yet an issue on the radar. Although U.S. unemployment has improved, the number of people seeking work remains high. This in turn exerts downward pressure on wages, a key driver and influence in the inflation equation. Although interest rates remain low and employment is improving, inflation is not seen as a threat to near-term economic stability and growth.
That being said, when interest rates increase - bond prices decrease and we remain vigilant regarding this specific issue. We do expect interest rates to rise somewhat this year, with the 10 year U.S. Treasury range being 3-3.5%
As a further sign of market sentiment toward inflation, gold is often seen as an inflation hedge. Without that need, and with the general economic strengthening that took place last year, gold values declined close to 30% in 2013.
Globally in 2014, economic growth is expected to strengthen. Last year Europe’s situation improved as ECB President Draghi signaled that he’d use whatever tools possible to continue the strengthening of the previously anemic economy. Confidence was restored, credit markets responded positively, and Europe emerged from the recession. Still not out of the woods completely, as the economy continues growing, inflation will need to be watched closely.
Japan registered positive economic growth for the year of 1.8%. Prime Minister Abe’s three-pronged plan continues, with the Bank of Japan continuing its aggressive QE program and a new sales tax beginning this April. Adopting a wait-and-see approach seems to be the consensus from the analysts we follow.
China also fits the wait-and-see mode for investing. With the announcement in November of a comprehensive plan to overhaul their economy by 2020, China’s leadership signaled their resolve to tackle systemic fiscal reform head-on. The impact of the changes no doubt will be clearer over time, but as we suspected, through loosening their one-child policy, they’ve shown that no sacred cow will remain that way. As with any policy changes, there are always trade-offs. While altering this law will impact consumer spending positively in the longer term, in the shorter term, there will possibly be a significant reduction in the workforce with women choosing to go on maternity leave.
In summary, in 2014 we believe we’ll continue experiencing slow growth rates, low interest rates and low inflation. More importantly however, and regardless of the circumstances that arise, we intend to continue following a sound approach to working with you regarding your financial needs. By adhering to our asset allocation models, communicating clearly and promptly with you as the need arises, and prudently watching the horizons for unanticipated events, we look forward to helping you even more throughout the coming 2014 year.
Sincerely,
TLA Wealth Advisory Team
*Indices mentioned are unmanaged and cannot be invested into directly. Past performance is not a guarantee of future results.
Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member NASD/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Taddei, Ludwig & Associates are not affiliated.
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