The stock market put in a stellar performance in 2013, with major indexes soaring to all-time highs and posting gains of nearly 30 percent — the best since the 1990s. Investors are betting that a detente in Washington's fiscal wars will allow the U.S. economy to pick up some steam in 2014.
Many small investors who were burned by two major stock collapses in the 2000s and avoided the market for years are beginning to be drawn back into stocks by the big gains last year. While stocks were soaring, some popular alternatives had dismal years. Broad measures of the bond market declined, while gold plummeted by 28 percent in its worst crash since 1981.
The U.S. market performed better than most other developed countries' markets and even handily beat emerging titans such as China, Brazil, Turkey and Russia, making it the place to be for global investors last year. The broadest measure of the U.S. market, the Standard & Poor's 500 index of blue-chip stocks, closed up 7 points at 1,848, a record, capping a robust 29.6 percent gain.
The much-watched Dow Jones industrial average surged 72 points on the last day of trading to a new high of 16,577, racking up a 26.5 percent gain for the year. But the best-performing U.S. index was the technology-driven Nasdaq Composite index, which surged by 38.3 percent in 2013 and ended at 4,177 — a level not seen since the end of the tech stock boom in September 2000.
"The U.S. stock market had a very good year in 2013," said Gary Thayer, chief macro strategist at Wells Fargo Advisers. "The U.S. economy is doing better than many foreign economies" despite the mostly tepid growth rates posted during 2013, he said, noting that Europe is struggling to emerge from recession while China is contending with a major economic slowdown that has helped cool growth in much of the rest of the world. Among the major economies, only the stock indexes in Japan, where the economy is rebounding from a recession, outperformed U.S. indexes with a 56.7 percent yearly gain — the biggest since 1972.
Russ Koesterich, chief investment strategist at BlackRock, said stock investors took heart that many potential crises were avoided during 2013, paving the way for a more substantial economic recovery.
"China avoided a hard landing; except for a short-lived scare over Cyprus, Europe managed a year without a crisis; the Middle East continued to simmer, but failed to erupt; and while Washington provided its usual drama, politicians did not do any lasting damage," he said.
Even the year's unexpected developments proved to be beneficial, he said. "The two biggest surprises were that inflation fell even further than I expected, and the economy held up relatively well, despite massive fiscal drag."
Among the biggest gainers in the U.S. were companies most exposed to the economic recovery, such as retailers and industrial stocks. As the end of the year approached, investors sensed an uptick in economic momentum that was overshadowed for much of the year by the drag on growth from several rounds of federal budget cuts, tax increases and fiscal battles in Washington. As those fiscal wounds faded, a picture of a more robust and strengthening economy emerged, with growth picking up to a 4.1 percent annual rate in the third quarter and employers quickening their pace of hiring.
Stocks got a final boost for the year Tuesday when the Conference Board reported a surge in consumer confidence back to levels that prevailed before the October government shutdown, a development that bodes well for spending in the new year. Consumer spending drives about 70 percent of U.S. economic growth.
Mr. Thayer expects the uptick in growth to continue into 2014, lifting stocks further. After being downtrodden for much of the past decade, he said, the U.S. economy will be buoyed for years to come by the boom in oil and gas exploration in the nation's heartland and the low energy prices that the boom is generating, providing a big boost to consumer spending power.
The energy bonanza "has opened the door for potentially below-trend energy prices for years," he said. "That is good for countries like the U.S. that consume a lot of resources."
Lower energy prices mean lower costs for U.S. corporations, enabling firms to continue to post the outstanding earnings performances that have underpinned the stock market's nearly five-year-long bull run.
With the economy and revenue growing slowly, corporations have eked out strong profits by taking advantage of cost savings where they can, through lower prices and interest rates, while ruthlessly cutting costs elsewhere, including keeping a lid on wages and hiring only when absolutely necessary.
Investors have enjoyed a historically large share of the corporate income pie as it grew in recent years. While announcing consistently solid quarterly earnings, corporations padded investor returns by using some of their estimated $2 trillion in accumulated cash to buy back stocks and issue dividends — moves that primarily benefit investors and corporate executives who hold company shares.
Consumers and workers, by contrast, had to get by with wage gains ranging around 2 percent, the weakest performance for wages in any economic recovery.
Still, consumers are getting a lift, at least psychologically, from the big gains in the stock market as well as housing prices, which also posted double-digit increases in the past year, said Chris G. Christopher, an economist at IHS Global Insight.
While stocks rose the most, the 13.6 percent gain in home prices reported by S&P/Case-Shiller on Tuesday affects the most people because homes are the biggest assets for middle-class consumers. Economists expect home price gains to slow in 2014, however, as a result of the Federal Reserve's gradual paring-down of monthly purchases in the U.S. Treasury and mortgage bond markets, which already has caused a notable rise in mortgage interest rates.
Lynn Franco, an economist at the Conference Board, said consumers — like the stock market — have weighed the pluses and minuses and appear to be going into 2014 with renewed optimism.
"Despite the many challenges throughout 2013, consumers are in better spirits today than when the year began," she said.
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