2013 Year in Review – Highlights of the Year
Record-breaking moves in the equities was the hot-topic for 2013, with the Dow Jones currently up around 19% from January, while the S&P 500 is up nearly 24% year-to-date. Both large-cap indices broke new ground, with the Dow eclipsing the 16,000 mark and the S&P taking out 1,800 points in late November. Also of note is the NASDAQ composite index, which at 30% up year-to-date, has been the strongest index of the three majors, and is currently trading above the 4,000 point level, a threshold not seen since the tech bubble days.
Then there was the Fed taper and the perhaps most grating quote of 2013 : “good news is bad news, bad news is good news.” This seemingly illogical sentiment arose from the speculation that if enough economic metrics trended positively, the Federal Reserve would begin to cut down on its massive quantitative easing program, which has been artificially propping up the record moves in equities. However, if economic data suggested that more central bank help was necessary, FOMC meeting minutes confirmed that Fed chairman Ben Bernanke was more than willing to let loose the monetary spigot. On December 18th, the Fed did both, slightly tapering off QE while extending low interest rates much further than expected.
The Labor Department’s monthly jobs report was a key focus for economists and traders alike : 2013 was quite a volatile and contentious year in this regard, as the velocity of employment opportunities created slowed down heading into the holiday season, only to be rebuffed with numbers above-expectations, led by a spurt in seasonality-related trends. However, the quality of jobs created was a major criticism, with many arguing that low-salary positions were distorting the true realities of the labor market.
Finally, there was the acrimony in Washington : from October 1st through the 16th, the federal government entered a shutdown after Congress failed to enact legislation appropriating funds for fiscal year 2014. During the shutdown, approximately 800,000 federal employees were indefinitely furloughed, leading Business Roundtable President John Engler to remark, “The government shutdown and flirtation with default have dealt a severe and entirely avoidable blow to America’s reputation around the world while harming economic growth and job creation.” Unfortunately, it also set a bad precedent that politicians were willing to play, and see through, a dangerous game of chicken with the American public, and this will be a difficult breach of trust for the voting constituents to forget.
Currencies – FOREX Market
Volatility was the theme of the year as the U.S. dollar index reached a peak of nearly 85, while hitting a low of 79 both in February as well as in late October. Much of the reason had to do with trading sentiment as the investment community frustratingly played along with coy FOMC meeting minutes and often ambiguous and conflicting remarks from Fed officials.
The Japanese Yen was the most talked about currency of 2013, as the Yen index lost 15% of valuation year-to-date. This was a direct result of an aggressive monetary policy set in place by the Bank of Japan as part of newly elected Prime Minister Shinzo Abe’s pledge to rid Japan of nearly two decades of stifling deflation. As expected, this boosted Japan’s exporters and large-cap companies and rocketed the Nikkei 225 index 47% up year-to-date.
The Euro currency was one of the most sharply volatile, as traders absorbed both dovish and hawkish statements from European Central Bank president Mario Draghi. Also, the bifurcated nature of the European region highlighted by the record breaking move in the German stock market while also being weighed down by stubborn unemployment rates, particularly in Spain, meant that market participants never had a dull moment with the Euro.
Winners & Losers
Best Buy (NYSE : BBY)
After being one of the worst companies of 2012 when stock valuations dropped 48% and when bankruptcy rumors were rampant, Best Buy staged one of the most remarkable comebacks of 2013, and is currently trading up 256% year-to-date. Both fundamental and technical factors were at play : the management team re-focused their marketing and advertising efforts, while technically, bearish trading activity all but exhausted itself by December of 2012, allowing for the bulls to push the stock dramatically forward. Also, consumer cyclicals became the best performing sector of the S&P 500 later in 2013, and Best Buy was clearly a beneficiary of the increased retail confidence.
J.C. Penney (NYSE : JCP)
Unfortunately, the rise in consumer confidence could not help J.C. Penney investors out of their bind, with their stock easily the worst performer out of all the S&P 500 companies. Chaos in management as seen by multiple swaps at the head office combined with dismal sales in an extremely competitive industry made for a compelling case of imminent bankruptcy. While such fears are allayed for now, J.C. Penney was forced to squeeze margins to stay afloat, and bearish activity abounds on the trading floor. Although this retailer is expected to be around next year, needless to say, its long-term prospects are extremely doubtful.
Gold and the mining industry were amongst the worst hit commodities in 2013, with the yellow metal down -27% year-to-date. A lack of inflationary fears, a key impetus in its prior bull runs, was cited by metals experts as a pivotal factor for its downfall. Growing consumer confidence combined with the specter of Fed tapering, led many investors to seek safety in other alternative assets. Also, rising import taxes in India, the world’s biggest consumers of gold, contributed to a decline in overall demand.
Silver bullion took an even heftier fall, dropping nearly 36% of valuation year-to-date. Like gold, the lack of inflationary fears quelled investor enthusiasm who view silver as a cheaper alternative to its more expensive cousin, while demand from its industrial component also fell along with other commodities that make up the CRB index.
Palladium was the only asset that bucked the trend of heavy losses within the entire metals complex, which is currently trading near parity with its opening session. A key contributor was automotive demand, which has been a surprisingly strong sector within the domestic equities market and accounts for roughly 80% of total palladium consumption. Its outlook for 2014 remains positive despite the turmoil for the rest of the precious metals, primarily due to supply disruption concerns in South Africa and Russia, which are the world’s top producers of this rare element.