12/31/13   2013 Is History, 2014 Awaits

Editor’s Corner

Ron Rowland

Just a few hours remain in 2013, and financial trading has come to a close.  You may remember that early in the year many analysts were calling a top nearly every time the market declined.  Stocks had the last laugh though, marching upward throughout the year and rendering those gloomy predictions useless to most investors and damaging to those who heeded the advice to sell.

It was a good year for most equity markets and a not-so-good year for other asset classes.  Domestic small cap stocks were the big winners, gaining more than 38% by most measures.  Slicing the small cap designation a little thinner, stocks in the Russell Micro-Cap Index boasted returns in excess of 45%.  International stocks were mixed, with developed foreign markets gaining about 21% while emerging market stocks lost ground.  The benchmark iShares MSCI Emerging Markets ETF (EEM) declined about 4% for the year.

Bonds had a tough year, and nearly every segment posted losses.  The U.S. aggregate bond market shed about 2% for the year.  Losses were steeper among Treasury securities, as the iShares 7-10 Year Treasury Bond ETF (IEF) dropped more than 5%, even after adding in its monthly dividend.  Longer maturities meant larger losses as the Vanguard Extended Duration Treasury ETF (EDV) plunged 20%.  Hopefully, bond investors have gotten the message that Treasury bonds are not automatically safe.  There was no hiding in international bonds either, with developed country government issues declining 3% and emerging market bonds dropping about 10%.  One segment that managed to post gains for the year was corporate high yield (“junk”) bonds, with most funds targeting this segment advancing 5% or more.

Commodities also failed to produce profits in 2013.  The largest multi-commodity ETF, PowerShares DB Commodity Index (DBC), dropped more than 7%.  Gold was a big story in 2013, partly because the yellow metal plunged more than 28%.  Energy was the only major commodity group posting profits for the year with United States Natural Gas Fund (UNG) gaining about 10% and the United States Oil Fund (USO) advancing around 6%.

It will be another year before anyone knows the 2014 results, but that hasn’t stopped many people from making predictions.  The first trades of the year will begin in less than 48 hours.  We wish you a happy and prosperous New Year.

Investor Heat Map: 12/31/13

Sectors

Industrials maintained its first-place ranking, and Technology stayed close behind in second.  Materials continued its recent climb, improving from fourth to third this week.  Having Industrials and Materials together near the top is reminiscent of a strong global economy, and there is probably at least one economist willing to claim that is exactly what we have.  Consumer Discretionary improved its absolute strength while simultaneously slipping a notch in relative strength.  Health Care and Financials held their ground in the middle of the pack.  Telecom and Energy swapped places with Telecom coming out on top today.  The bottom of the rankings stayed much the same with the defensive groups of Consumer Staples and Utilities barely clinging to positive trends while Real Estate trails behind.

Styles

A couple subtle changes in the Style rankings produced a more definitive pattern.  Small Cap Growth and Small Cap Blend swapped places, although they were in a virtual tie a week ago.  Small Cap Value and Large Cape Growth also swapped places, and they too had identical momentum readings last week.  However, these seemingly insignificant changes now put the four smallest capitalization segments at the top in order from Growth to Value.  Micro Cap claims the overall leadership position while the three Small Cap categories take second through fourth.  The lower half remains a somewhat disorganized mixture of Mid Caps, Large Caps, and Mega Cap.  Mid Cap Value resides at the bottom, although with a momentum reading indicating an upward trend of 23% per year it really can’t be called weak.

Global

Europe was challenging the U.S. for the top spot a week ago, and today it has a firm grasp on the position.  The U.S. dropped to second and is again facing competition, this time from the U.K.  Recent strength in the British Pound has been a positive influence and could be the deciding factor over the next few weeks.  World Equity and EAFE round out the top five, after which there is a large drop-off in momentum readings.  Japan and Canada are next in line, just as they were a week ago.  China and Emerging Markets managed to shake off their negative readings, but their new positive scores are far from being solid.  Pacific ex-Japan and Latin America gained strength yet remain in negative trends.

Note:

The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.

 


“The more colorful your pie chart, the worse you did.”

Lawrence Glazer, managing partner at Mayflower Advisors on 2013 investment results


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