NEW YORK – 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 a good year to wear noise-canceling headphones,” said 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 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 $3 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 to 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 aren’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 perform well
Some of the best performers in 2013 weren’t the big blue-chip stocks, but smaller ones. The Russell 2000, an index that tracks small stocks, rose 37.1 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.
Bond party is over
Yes, they were safe, but with 10-year Treasury notes paying interest below 3 percent for most of 2013, 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. This year, bonds in the index handed investors a loss of 2 percent, the first loss 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 dips
Even with all the unsettling headlines, 2013’s stock surge was achieved without a significant wobble. The S&P 500 has gone more than 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?
Investors unhappy?
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 because of 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.
Investors put $77.6 billion into U.S. stock funds in the first 11 months of the year, according to Lipper fund data. The last time investors put more money into stocks than they took out was 2005. But the inflows were only a trickle compared with the $451 billion withdrawn from stock funds between 2006 and 2012.
IPO market is back
The number of initial public offerings rose to its highest level since before the recession in 2007, according to data from Dealogic as of Dec. 17. It’s easier for companies to sell stocks in a climbing and steady market because investors are more confident they can make money.
The average IPO stock rose 35 percent in 2013, outperforming the S&P 500, according Renaissance Capital data.
Hotel chain Hilton Worldwide and social-media site Twitter went public. In total, companies sold $61 billion of stock in 2013 as of Dec. 17, an increase of 30 percent from 2012.
In the years that followed the financial crisis and the Great Recession, a volatile stock market made listing new companies more difficult, says Scott Cutler, head of global listings for the New York Stock Exchange. The smooth ascent of stocks in 2013 ensured that the market for IPO’s stayed open all year.
“I expect the environment to continue as we have seen it in 2013,” Cutler said. “Investors have been making money in equities again.”
Change is constant
The 30-member Dow got a makeover in September, swapping out three old members for three new ones. It was the biggest shake-up for the blue-chip index in almost a decade. Out went aluminum producer Alcoa, Bank of America and Hewlett-Packard. In came Nike, Goldman Sachs and Visa. Despite its name, the Dow Jones industrial average is no longer dominated by industrial companies and now contains financial firms like JPMorgan and Travelers, as well as retailers such as Home Depot and Wal-Mart, reflecting the changing nature of the U.S. economy.
Europe is improving
Jitters about Europe subsided. In 2012, concerns about the health of the banking systems in Spain and Italy weighed on U.S. stock markets. In 2013, despite some flashbacks – worrying Italian elections in February and the collapse of the Cypriot banking system in March – investors didn’t panic.
There’s always a glitch
A technical glitch halted trading on the Nasdaq for three hours in August, embarrassing the stock exchange that hosts the biggest names in technology, including Apple, Microsoft and Google. Though less alarming than the “flash crash” of 2010 that set off a stock market plunge, it once again raised questions about the pitfalls of the electronic trading that now dominates stock exchanges.
The glitch in August was the most notable of 2013 for the Nasdaq, but not the only one. There were brief outages in September and November.
Dividends matter
Investors also focused on dividends as bond yields started 2013 close to record lows.
The S&P 500 dividend yield, which measures the dividend payment on stocks versus their price, started the year at 2.17 percent, higher than the 1.76 percent yield on 10-year Treasury notes.
Utilities and phone companies, traditionally big dividend payers, began the year strongly as investors sought steady stocks with bond-like characteristics. Utility companies in the S&P 500 surged 18 percent in the first four months of 2013 before Treasury yields started rising, curbing their appeal.
Companies are also taking note of investors’ desire to see dividend payments. As of Dec. 20, 417 companies in the S&P 500 were paying dividends. That’s the highest number since 1998 when 418 companies were paying regular dividends.
Including dividends, the S&P 500 returned 31.9 percent, and the Dow 29.1 percent.
Fed matters more than Congress
While budget battles have rattled the markets before, investors began to get wise to Washington’s habit of wrangling until the last minute before reaching agreements on the budget and other fiscal policy.
In 2011, lawmakers shook financial markets when they argued about raising the debt ceiling and pushed the U.S. toward default. Stock markets slumped before a deal was reached at the start of August and then plunged further as the Standard & Poor’s rating agency cut the nation’s debt rating days later. The S&P 500 dropped 15 percent in a four-week period between July 20 and Aug. 10, 2011.
In 2013, investors stayed calm despite the first government shutdown in almost two decades and brinksmanship over the debt ceiling. After dipping briefly at the start of the shutdown, the S&P 500 rose 2.4 percent between Sept. 30 and Oct. 16, when a deal was reached to fund the government and avoid default.
“Not that Washington has yet become a positive, but I think that the bar got so low it was pretty much on the ground,” says Liz Ann Sonders, chief investment strategist at Charles Schwab & Co.
2013 memorable for Wall Street
There were plenty of big moves on the stock market in 2013, and the causes of many of them could be traced back to Washington.
Investors dumped stocks when political gridlock brought the country perilously close to defaulting on its debt. They also fretted when Congress shut down the government rather than pass a budget. Likewise, markets shot higher when the dysfunction appeared to pass.
The Federal Reserve was also top of mind for Wall Street in 2013. The U.S. central bank’s aggressive bond-buying program has pumped money into financial markets and kept long-term interest rates extremely low.
Trying to guess when the Fed would start winding down its $85 billion a month in bond purchases became the biggest parlor game of the year on Wall Street. In mid-December, the Fed finally gave its answer: Citing an improving economy, Fed officials said they would start to reduce the purchases in early 2014.
Here are some of the biggest gains and drops of the year in the Dow Jones industrial average and what caused them.
The Biggest Gains:
Oct. 10: Up 323 points. Markets soar after Republican leaders and President Barack Obama seem willing to end a 10-day standoff over fiscal issues that threaten to leave the U.S. unable to pay its bills.
Jan. 2: Up 308 points. Stocks start the year with a bang. Investors are relieved after lawmakers hammer out a last-minute budget deal to avert the “fiscal cliff” of sharp tax hikes and across-the-board spending cuts.
Dec. 18: Up 293 points. When the Fed finally announces its decision to begin reducing, or “tapering,” its bond purchases, investors rejoice, seeing it as a vote of confidence in the U.S. economy.
June 7: Up 207 points. Investors are encouraged that hiring picked up in May but not so fast that it might prompt the Fed to move quickly to reduce its economic stimulus. Analysts call the 175,000 job additions a “Goldilocks” number.
Oct. 16: Up 205 points. A last-minute agreement to keep the U.S. from defaulting on its debt and reopen the government after a 16-day shutdown sends stocks soaring. The deal is reached just hours before a deadline to raise the nation’s debt limit.
The Biggest Drops:
June 20: Down 353 points. The Dow has its worst day of 2013 after the Federal Reserve says it might pare back its economic stimulus program later in the year.
April 15: Down 265 points. A plunge in commodity prices spills over into the stock market. The price of crude oil sinks to a four-month low, pulling energy stocks lower. Mining companies drop after the price of gold has its biggest one-day fall since 1983.
Aug. 15: Down 225 points. Investors dump stocks following dour sales forecasts from Wal-Mart and Cisco and on concern that the Fed will soon start withdrawing its support for the economy.
June 5: Down 217 points. Investors worry about a series of troubling economic reports, including weak hiring at private companies, sluggish factory orders and limited growth in the service sector.
Feb. 25: Down 216 points. Fears of another flare-up in Europe’s debt crisis hit U.S. markets. Results from an election in Italy appear to push the country toward political gridlock, undermining efforts to shore up Italy’s finances.
