2013 – A Year to Remember

Let’s first take a look at the U.S. stock market which punctuated an extraordinary year with gains on the last trading day, moving many of the American indexes to record highs on the final trading day for only the sixth time in history. Despite all the uncertainties that the U.S. faced (the government shutdown, Boston bombings, the ongoing Syrian uprisings, debt ceiling debates, nuclear standoff with Iran) people will look back at 2013 as one of the most profitable years for investors on record.

The Wilshire 5000 index–the broadest measure of U.S. stocks and bonds–rose 31.42% in calendar 2013, with 10.11% of the gains coming in the final three months of the year. The comparable Russell 3000 index gained 33.55% in 2013, posting 10.10% returns in the final quarter.

What makes the year even more remarkable was that nobody was predicting a rampaging bull in 2013, and many economists and pundits didn’t think returns like these would be possible.

If anything, the five-year gains since the market downturn have been even more extraordinary. The Wilshire 5000 has posted an average 18.58% gains over the last 60 months, and the midcap (23.08%) and small cap (23.86%) indices have fared even better. Investors who got out of stocks during the market crisis of 2008 and worried ever since have missed out on one of the best 5-year bull market runs in American history.

Is this a bull market? Commentators, investment strategists and economists don’t agree on whether we are experiencing a temporary rise in the midst of a long-term bear market, like we experienced during the Great Depression, or the strong early stirrings of a long-term bull like the one which started in 1982. The truth is, nobody knows, just as nobody knew that the U.S. stock markets would reel off such strong returns after the near-collapse of the global economic system.

Long-term investors can be compared to farmers, who plant seeds with no foreknowledge of the weather during their growing season, and no belief that what happened this year has any impact on what will happen in the next one. There will be bad years, and good years, but over time, the good years have tended to outnumber bad ones, which is why it makes economic sense to continue planting the seeds each Spring–or staying invested in the stock market when each coming year is a mystery.

Around the world, the harvest was mostly excellent in 2013, even though returns lagged the booming U.S. market. The broad-based EAFE index of developed economies rose 19.43% in dollar terms in 2013, aided by a strong 5.36% return in the final quarter. European stocks were up 21.68%, giving them a strong year despite the constant threat of sovereign debt default.

Emerging market stocks were a very different story. In 2013, the EAFE Emerging Markets index of stocks in Latin America, the Middle East, Eastern Europe, Africa, India and Russia was down 4.98% for the year, despite a 1.54% rise in the year’s final quarter.

Other investment categories also lagged their long-term averages. Commodities, as measured by the S&P GSCI index, experienced a price collapse, losing 26.73% in 2013. Gold investors, meanwhile, experienced the precious metal’s worst annual loss in 32 years, dropping 28% in value over the past 12 months.

What’s next? Who knows? Long-term, stocks tend to reflect the overall growth of the economy. One possible reason why so many investors remain nervous about stocks is the persistent–and erroneous–belief that the U.S. economy is still mired in a recession. You hear words like “sluggish” in the press, but in fact, the total output of the American economy has grown steadily since the 2008 meltdown, and the pace of growth seems to be accelerating.

Even so, many investors will continue to wait on the sidelines, looking for “proof” that the market recovery is finally for real, while others will keep their money from working on their behalf in expectation of a crash. The former will finally get back in when prices have peaked, and will, in fact, be our most reliable indicator that the market has become overvalued. The latter will miss the next downturn, but also lose out on the positive returns that have, historically, outweighed the losses suffered in bear markets. The past five years have given us a useful lesson: that you plant your seeds in the expectation that there will be bad crops from time to time, but these unexpected booming years will more than make up for the losses.

Duncan R Glassey
Senior Partner – Wealthflow LLP

duncan.glassey@wealthflow.com

This article is distributed for educational purposes and should not be considered investment advice or an offer of any product for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. Past performance is not indicative of future results and no representation is made that the stated results will be replicated. Errors and omissions excepted.