January 22, 2014

US stocks had a stellar year and investors will likely be sad that 2013 ended. Improvement in the economy, a strong credit market, more stock repurchases, increased dividends, mergers & acquisitions and rising earnings were some of the highlights of the year. Additionally, the financial health of the American consumer appears to have improved, but the implementation of the Affordable Care Act, or "Obamacare," has many people, businesses and even state and local governments on edge.

Most benchmarks ended near or at their respective highs of 2013. In fact many were setting or near all-time highs or 13-year highs. The performances were extremely strong, both domestically and internationally for the most part. In fact the S&P 500 Index (SPX: 1,848.21), the benchmark that many managers use, surged 29.6%, its best performance since the start of the millennium. The Dow Jones Industrial Average (DJIA: 16,576.41) spiked 26.5% and the Russell 2000 Index (RUT: 1,163.47) soared 37.0%. SPX, DJIA, and RUT ended at new all-time highs.

The Nasdaq Composite Index (COMPQ: 4,176.58) and Nasdaq 100 Index (NDX: 3,59200) leaped 38.3% and 35.0%, respectively, to new 13-year highs. The most outstanding performance of the major measuring sticks went to the Dow Jones Transportation Average (DJTA: 7,400.13), which rocketed 39.5% to a new all-time high (see chart). One of the weakest performers was the Dow Jones Utilities Average (DJUA: 490.56), which add-ed 8.3%.

We want to take a moment to acknowledge a major losing group. The precious metals were sharply lower as investors and traders shrugged off inflationary fears. Gold plunged 25.4% and silver plummeted 33.5%. As a result the PHLX Gold/Silver Index (XAU: 84.17) sank 49.2% to its lowest level in five years.

The best performing groups included computers & electronics (+168.1%), office services & supplies (+95.3%), office electronics (+78.3%), biotechnology (+74.2) and Internet retailers (+73.3). The worst performers were gold (-50.5%), residential REITS (-9.9%), coal & consumable fuels (-3.8%), retail REITS (-3.5%) and office REITS (-3.2%).

One of the major concerns has been the contraction of volume. This is partly due to Dodd-Frank regulations but also the result of fund managers awaiting a major correction.

Hedge Fund Performance

Average hedge fund performance for global macro funds, according to Greenwhich, was about 7.5%. This is was due to hedges against downside risk. Additionally, some managers that underperformed the average remained largely in cash, awaiting the "correction" that failed to emerge.

Expectations

It would be hard pressed for the benchmarks to repeat the performance they achieved in 2013. On average DJIA and SPX rise between 8% and 16% on a usual year in a bull market. However, given that this is a mid-term election year, expectations for an-other double-digit percent gain are high.

Given that scenario, there is increasing probability for a traditional 10% correction. That would likely provide a buying opportunity for those that have waited out the market, but they need to take advantage of such a drop..

Furthermore, the markets performance is narrowing a bit and this is becoming more of a stock pickers market, meaning that stock selection and strategy creation will become more imperative. Contact us for more details and thoughts as the year progresses.

ABOUT THE AUTHOR
Michael J. Levas has been in the investment management business for over twenty years and is the founder,senior managing principal & director of trading at the Olympian Group ...