Connecticut Capital Management Presents:
QUARTERLY ECONOMIC UPDATE
QUOTE OF THE
QUARTER
“To win without risk
is to triumph without
glory.”
– Pierre Corneille
QUARTERLY TIP
See that your
portfolio is balanced
and adequately
diversified for the
new year. After the
gains of 2013,
rebalancing might be
in order.
A review of 4Q 2013
THE QUARTER IN BRIEF
The last three months of 2013 were relatively placid on Wall Street. Interestingly,
the day that many investors dreaded turned out to be the best trading day of the
quarter. The Dow rose 292 points on December 18, when the Federal Reserve
announced the oncoming tapering of its economic stimulus. The DJIA gained 9.56%
in Q4, and the Nasdaq and S&P 500 did even better. Key foreign indices mostly
advanced, even though economic indicators from Europe and China were decidedly
mixed. Mortgage rates increased and the housing market cooled down a bit. Gold
sank and oil rebounded. Consumers grew more optimistic about the economy, but
also grew frustrated with both Congress and the Affordable Care Act. 1,2
DOMESTIC ECONOMIC HEALTH
Arguably the biggest headlines in Q4 2013 came out of the nation’s capital. The
federal government shut down for 16 days in October, and though it merely paused
the bull market, Standard & Poor’s estimated that it put a $24 billion dent in the
economy. In better news, the House and Senate arrived at a 2-year budget
agreement in December, quelling fears of another shutdown for January.3
The Fed elected to reduce its monthly asset purchases from $85 billion to $75 billion
starting in January, with the chance of further “measured reductions” this year. It
made no move with interest rates. While the Congressional Budget Office projected 7
million Americans would sign up for their own health care via the health insurance
exchanges by the end of 2013, the reality was in the vicinity of 2 million due to
technical difficulties. Additionally, 4 million insured Americans found out that their
coverage was being cancelled because it did not meet ACA standards.3,4
As for economic indicators, things seemed to be clearly improving. The jobless rate
was 7.3% in October, then 7.0% in November. Q3 GDP was 4.1%; economic growth
has averaged about 2% since 2009. The Institute for Supply Management’s factory
PMI reached 56.4 in October and 57.3 in November (its highest reading in almost
three years); ISM’s service sector index was at 53.9 in November, signifying a 47th
straight month of expansion.3,5
Consumer spending rose 0.5% in November after a 0.4% October gain. Meanwhile,
consumer inflation dipped 0.1% in October and stayed flat in November. Retail sales
were up 0.6% in October and another 0.7% a month later. As for big-ticket items,
durable goods orders rose 3.5% in November, offsetting a 0.7% dip for October. The
Producer Price Index retreated 0.2% in October and 0.1% in November.6
By December, the Conference Board’s consumer confidence index was at 78.1 after a
monthly gain of 6.1 points. December’s University of Michigan consumer sentiment
index hit a 6-month high of 82.5 in December.3,6
GLOBAL ECONOMIC HEALTH
As 2013 ended, it was apparent that the boost in U.S. manufacturing during Q4
wasn’t being replicated in Asia. China’s official purchasing manager index came in at
51.0 in December, down from the previous 51.4, and the private sector HSBC PMI
retreated 0.3% to 50.5 for December. The region’s best PMI was that of Taiwan
(HSBC PMI of 55.2, up from 53.4 a month earlier). South Korea’s HSBC PMI was a
middling 50.8 in December, 0.4 higher than in November. Elsewhere, the Markit
PMI for Australia slipped down to 47.6, and Singapore’s economy contracted 2.7%
for the quarter. Is the link between western growth and Asia’s growth still strong?7
France was plainly the economic laggard among the major EU nations in Q4, with its
Markit factory PMI dropping below 50 in November and December (it finished 2013
at 47.0, a 7-month low). In contrast, the manufacturing PMI for the United Kingdom
finished the year at 57.3 and came in at 58.1 in November. The quarter saw Spain’s
factory PMI move back into the expansion zone (it was at 50.8 by December) and
the euro area composite PMI finish the year at 52.7. Germany’s Markit PMI hit a 30month peak of 54.3 in December. The quarter saw the European Central Bank lower
its benchmark interest rate 25 basis points to a record-low 0.25%. Annual eurozone
inflation was just 0.9% in November compared to 2.2% a year earlier.7,8,9
WORLD MARKETS
How did other benchmarks do in Q4? The aberration that is Venezuela’s Caracas
General exchange aside (+52.49%), some of the best Q4 performers were
Argentina’s MERVAL (+12.69%), Germany’s DAX (+11.14%), Pakistan’s KSE 100
(+15.70%) and Japan’s Nikkei 225 (+12.70%). Now for some of the worst
performers: Thailand’s SET (-6.11%), Turkey’s BIST 100 (-8.97%) and the
Philippines’ PSE Composite (-4.88%). Other notable indices: MSCI World, +7.61%;
MSCI Emerging Markets, +1.54%; Global Dow, +7.56%; Asia Dow, +1.94%; Europe
Dow, +7.05%; IPC All-Share, +6.33%; Kospi, +0.72%; Shanghai Composite, - 2.70%;
Sensex, +9.24%; STOXX 600, +5.73%; CAC 40, +3.68%; FTSE 100, +4.44%;
Bovespa, -1.59; TSX Composite, +6.52%.2,10
COMMODITIES MARKETS
The big story here was the freefall for gold and silver. Gold prices dropped 9.4% in
Q4 and 28.3% on the year to settle at $1,202.30 on December 31. Gold hadn’t had a
down year since 2000. Silver did even worse: it lost 10.8% for Q4 and 35.9% for
2013. Platinum futures dipped 2.7% in Q4, finishing 2013 at -10.9%; only palladium
posted an annual advance, going +2.1% despite a 1.2% loss in Q4. Copper ended up
retreating 7.0% for 2013. The U.S. Dollar Index was little changed on the quarter,
losing only 0.2%.11,12,13
The second biggest story in the commodities sector was the ascent of natural gas
futures – for the year, they went +26.2%. NYMEX crude ended the quarter with a
7.5% annual gain. While Q4 gains sent cocoa futures to +21.2% for the year, other
key crops suffered; 2013 losers included corn at -39.6%, coffee at -23.0%, soybeans
at -7.5%, wheat at -22.2% and sugar at -15.9%.12
REAL ESTATE
A comparison of Freddie Mac’s September 26 and December 26 Primary Mortgage
Market Surveys shows an increase in interest rates for the two most common types
of home loans. The September 26 averages: 30-year FRM, 4.32%; 15-year FRM,
3.37%; 5/1-year ARM, 3.07%; 1-year ARM, 2.63%. December 26 averages were as
follows: 30-year FRMs, 4.48%; 15-year FRMs, 3.52%; 5/1-year ARMs, 3.00%; 1-year
ARMs, 2.56%.14
As interest rates on conventional home loans increased, year-over-year existing
home sales decreased. After declining in August and September, they fell 3.2% in
October and 4.3% in November – and they were down year-over-year in November
(-1.2%) for the first time in more than two years. Shrinking inventory was a major
factor. Still, the National Association of Realtors reported a 9.4% annual gain in the
median price of an existing home in November to $196,300, and a 0.2% advance in
pending home sales after October’s 1.2% retreat. October’s S&P/Case-Shiller Home
Price Index recorded an overall yearly gain of 13.6% in house prices.6,15
How about new construction? Well, October saw a 25.4% rise in new home
purchases, followed up by a 2.1% decline in November; in November, new home
prices had risen 10.6% in a year. Building permits were up 6.2% in October, down
3.1% in November; by November, the annual gain was 7.9%. Housing starts soared
22.7% in November, resulting in a 29.6% yearly increase.16,17
LOOKING BACK…LOOKING FORWARD
The Dow, S&P 500 and Nasdaq all posted four consecutive monthly advances to
close out 2013, finishing the year as follows: DJIA, 16,576.66; S&P, 1,848.36;
NASDAQ, 4,176.59. The Russell 2000 wrapped up 2013 at 1,163.64, going +8.37%
for Q4 and +37.00% for the year; the CBOE VIX fell 17.35% in Q4 and 23.86% for
the year to settle at a mere 13.72 on December 31.2,18
% CHANGE
2013
4Q CHG
5-YR AVG
10-YR AVG
DJIA
+26.50
+9.56
+17.78
+5.86
NASDAQ
+38.32
+10.74
+32.96
+10.85
S&P 500
+29.60
+9.92
+20.93
+6.62
12/31 RATE
1 YR AGO
5 YRS AGO
10 YRS AGO
0.80%
-0.67%
2.14%
2.00%
REAL YIELD
10 YR TIPS
Sources: online.wsj.com, bigcharts.com, marketwatch.com, treasury.gov - 12/31/132,19,20,21
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly.
These returns do not include dividends.
Last year was the best for the S&P 500 since 1997 (and the worst for the CBOE VIX
since 2009). Could 2014 offer returns anywhere close to these? Almost no one thinks
so. In the final 2013 Reuters poll of stock market analysts, the consensus forecast
was for a 4.1% gain for the S&P 500 in 2014. This year might bring the end of QE3,
and we might see a stock market correction; we haven’t had one in about two years,
and historically they occur about once a year. There is plenty of good news to
consider, however: consumer spending is improving, consumer confidence has
increased, unemployment is lessening, the factory and service sectors are expanding,
and the Fed’s decision to taper didn’t send interest rates through the roof. The
average bull market lasts 3.8 years, and this one will turn five in March, yet Wall
Street seems confident that the bulls can keep running even as the central bank
winds down its asset purchases. If stocks gain 10% or better in 2014, that will be
another one of this bull market’s numerous pleasant surprises.3,18
Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC.
Cambridge and Connecticut Capital Management Group LLC are not affiliated. Investment Advisor Representative, Cambridge
Investment Research Advisors, Inc., a Registered Investment Advisor
This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their
affiliates. Marketing Library.Net Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you.
This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any
Federal tax penalty. This is not a solicitation or recommendation to purchase or sell any investment or insurance product or service, and
should not be relied upon as such. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks.
The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National
Association of Securities Dealers Automated Quotation System. The Standard & Poor's 500 (S&P 500) is an unmanaged group of
securities considered to be representative of the stock market in general. It is not possible to invest directly in an index. NYSE Group,
Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as
the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and
market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world's largest physical commodity futures
exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the
NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. The
Caracas General Exchange is the only securities exchange operating in Venezuela. The price-weighted MERVAL Index (MERcado de
VALores, literally Stock Exchange) is the most important index of the Buenos Aires Stock Exchange. The DAX 30 is a Blue Chip stock
market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. Karachi Stock Exchange 100
Index (KSE-100 Index) is a stock index acting as a benchmark to compare prices on the Karachi Stock Exchange (KSE) over a period.
Nikkei 225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei average is the most watched index
of Asian stocks. The Stock Exchange of Thailand is the national stock exchange of Thailand. The Borsa Istanbul (BIST) is the sole
exchange entity of Turkey. The main Philippines Stock Exchange index is the PSE Composite Index, which is composed of thirty (30)
listed companies. The MSCI World Index is a free-float weighted equity index that includes developed world markets, and does not
include emerging markets. The MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in
more than 25 emerging economies. The Global Dow (GDOW) is a 150-stock index of corporations from around the world, created by
Dow Jones & Company. The Asia Dow is an equal-weighted, 30-stock index that measures 30 of the leading blue-chip stocks traded in
the Asia/Pacific region. The Europe Dow measures the European equity markets by tracking 30 leading blue-chip companies in the
region. The Mexican IPC index (Indice de Precios y Cotizaciones) is a capitalization-weighted index of the leading stocks traded on the
Mexican Stock Exchange. The KOSPI Index is a capitalization-weighted index of all common shares on the Korean Stock Exchanges.
The SSE Composite Index is an index of all stocks (A and B shares) that are traded at the Shanghai Stock Exchange. BSE Sensex or
Bombay Stock Exchange Sensitivity Index is a value-weighted index composed of 30 stocks that started January 1, 1986. The Dow Jones
STOXX 600 Index captures more than 90% of the aggregate market cap of European-based companies. The CAC-40 Index is a narrowbased, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The FTSE 100 Index is a share index of the
100 most highly capitalized companies listed on the London Stock Exchange. The Bovespa Index is a gross total return index weighted
by traded volume & is comprised of the most liquid stocks traded on the Sao Paulo Stock Exchange. The S&P/TSX Composite Index is
an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market
capitalization. The US Dollar Index measures the performance of the U.S. dollar against a basket of six currencies. Additional risks are
associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting
standards. This material represents an assessment of the market environment at a specific point in time and is not intended to be a
forecast of future events, or a guarantee of future results. Past performance is no guarantee of future results. Investments will fluctuate
and when redeemed may be worth more or less than when originally invested. All information is believed to be from reliable sources;
however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not
indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is
not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the
services of a competent professional.
Citations.
1 - csmonitor.com/Business/Latest-News-Wires/2013/1218/After-Fed-tapers-stocks-hit-new-record [12/18/13]
2 - online.wsj.com/mdc/public/page/2_3022-quarterly_gblstkidx.html [12/31/13]
3 - dallasnews.com/business/business-headlines/20131231-aging-bull-may-still-have-more-room-to-run.ece [12/31/13]
4 - csmonitor.com/USA/DC-Decoder/Decoder-Wire/2013/1230/Obamacare-enrollment-surge-Mission-accomplished-or-misleading-blip [12/31/13]
5 - ism.ws/ISMReport/NonMfgROB.cfm [12/4/13]
6 - investing.com/economic-calendar/ [12/31/13]
7 - blogs.wsj.com/moneybeat/2014/01/02/macro-horizons-data-show-2013-ending-with-familiar-balance/ [1/2/14]
8 - nasdaq.com/article/european-stocks-turn-broadly-lower-after-pmi-reports-dax-down-053-cm315385 [1/2/14]
9 - economist.com/node/21592645/print [12/31/13]
10 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [12/31/13]
11 - coinnews.net/2013/12/31/gold-snaps-annual-winning-streak-silver-tumbles-in-2013/ [12/31/13]
12 - reuters.com/article/2013/12/31/markets-commodities-idUSL3N0KA0XL20131231 [12/31/13]
13 - online.wsj.com/mdc/public/npage/2_3050.html?mod=mdc_curr_dtabnk&symb=DXY [1/2/13]
14 - freddiemac.com/pmms/ [12/27/13]
15 - bloomberg.econoday.com/byshoweventfull.asp?fid=456315&cust=bloomberg-us&year=2013&lid=0&prev=/byweek.asp#top [12/19/13]
16 - bloomberg.econoday.com/byshoweventfull.asp?fid=456339&cust=bloomberg-us&year=2013&lid=0&prev=/byweek.asp [12/24/13]
17 - esa.doc.gov/economic-indicators/economic-indicators-6 [12/18/13]
18 - tinyurl.com/lnfj2gk [12/31/13]
19 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=12%2F31%2F08&x=0&y=0 [12/31/13]
19 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=12%2F31%2F08&x=0&y=0 [12/31/13]
19 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=12%2F31%2F08&x=0&y=0 [12/31/13]
19 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=12%2F31%2F03&x=0&y=0 [12/31/13]
19 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=12%2F31%2F03&x=0&y=0 [12/31/13]
20 - marketwatch.com/story/dow-closes-2003-strong-nasdaq-holds-2000 [12/31/13]
21 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [1/3/14]