Economic releases showed strength going into the year end. International Strategy & Investment's Ed Hyman reported that their survey of retailers showed that this was the strongest Christmas week on record. Factset's fourth-quarter estimated earnings growth rate for the companies in the S&P 500 was 6.3%, slower than the 9.6% projected at the beginning of the quarter. Yet, Factset's $119.66 forward earnings estimate for the next 12 months puts the year-end S&P 500 close of 1,848 at a price/earnings ratio of 15.4, by no means in “irrational exuberant” range. Capital markets responded as expected. Equity markets rose across the globe; government bond yields rose (and bond prices declined) in the final days of 2013; credit markets managed to generate positive return as credit spreads narrowed. The dollar fell against the Pound, Euro and Looney, but gained against the Yen; energy commodity prices fell and metals commodity prices were little changed since Dec. 20, 2013.

Perspective:

The Wall Street Journal’s headlined article, Winners of 2013: Boring Investors, lays out the argument that this year (as if it were an exception) those that bought and held U.S. stocks had some of the highest returns. Those investing in the S&P 500 Index beat those that invested through hedge funds or diversified by investing in commodities or non-U.S. markets. Some dub this strategy "dumb-money" as an alternative to "smart-money" strategies that might take on more risk or trade more actively. The tables below bear this out: There were strategies that did better than the S&P 500 Index this year; they include investments in the Japanese Nikkei (even after adjusting for the depreciation of the Yen), small stocks (the Russell 2000 gained over 36%) and the higher beta Nasdaq securities. Nonetheless, dumb-money strategies were not such a bad idea. Academic research provides some basis for dumb-money strategies; different studies have shown that 85% of active managers have failed to beat their passive benchmarks.

Economic Releases:

U.S. Personal Income rose +0.2% in November; from a year ago PI (red in the chart) rose 2.3%. Consumer Spending rose +0.5% in November; from a year ago CS (blue in the chart) rose 3.5%. PI's increase was led by the wages and salary component while CS's increase was led by durable goods. Both series rebounded from a softer October.

U.S. Durable Goods also gained strength in November. New Orders for Durable Goods increased 3.5% from the previous month and 10.9% from the previous year (blue in the chart). Even without the more volatile transportation component, Orders increased 1.2% in November and 6.1% from the previous year (red in the chart).

Other Economic Releases

Initial Jobless Claims have been volatile in recent weeks due to holiday seasonal adjustments. Yet, the week of Dec. 21, Claims dropped to 338,000. The four-week average of Claims still rose to 348,000. Continuing Claims moved 46,000 higher to 2.923 million. New Home Sales were 464,000 in November, above consensus, but below October's upward revised 474,000. September's New Home Sales were also revised sharply higher. In other U.S. housing news, the Case/Shiller Home Price Index rose 1.05% in October, up 13.61% year over year and the largest price gain since February 2006. The National Association of Realtors Pending Home Sales Index rose two ticks to 101.7 in November from a six-tick downward revised October print. A precursor to next week's Purchasing Managers' Surveys, the Chicago PMI fell four points to 59.1 in December, but remained well into the expansion zone (above 50); the three-month average of 62.7 was that highest three-month average since May of 2011. The Conference Board's Consumer Confidence increased six points to 78.1 in December.

There were few reports outside the U.S. France's third-quarter GDP was unrevised at -0.1%, but the second-quarter was revised a tick higher to +0.6%.

Industrial Production in Japan rose just +0.1% in November, 6.4% year over year. Japan's Markit Purchasing Managers' Index ticked up to 55.2 in December, further into the expansion zone. Japan's Unemployment Rate remained unchanged at 4.0%, but Retail Sales jumped to 4.0% in November.

Equities Markets:

The year ended on a positive note for equities. The Dow posted 52 record closes this year; the S&P 500 posted the best year since 1997; Canadian stocks posted their best return since 2010; European stocks posted their best year since 2009. Bloomberg News reported that U.S. Stocks beat government bonds by 32%, the widest spread since 1978. The ML Bond Indices in the chart include the impact of coupon payments, but the equity indices do not include the return that would have been accrued by dividends. The high yield market was able to generate a positive return for the year on narrowing credit spreads; the corporate and emerging markets generated negative returns for 2013. Stocks gained across the globe on the last 11 days of 2013, generating high single-/low double-digit returns for the quarter and solid double digit returns for the year. At the end of the year the narrowing of the credit spreads offset the declining interest rates sufficiently to give the credit bond markets a positive return since Dec. 20, 2013.

Bond Markets:

Government bond yields rose in the final days of 2013. On the year, spreads narrowed, but government rates rose; TIPS were one of the worst performing markets in the face of rising rates and in the absence of inflation. The U.S. Barclay's Aggregate Bond Index experienced its first annual loss (-2%) since 1999. The U.S. 10-year bond yield pierced 3.00% for the first time since July 2011.

Currencies & Commodities:

The U.S. dollar fell against the Pound, Euro and Looney, but gained against the Yen in the final days of 2013. On the year, the dollar gained against the Yen and Looney, but lost to the European currencies. Commodity prices weakened in the final days of 2013; only silver posted a positive return.

On the year, commodity prices, from gold to corn, experienced the first drop in five years. The 2013 plunge in gold prices was the worst in 32 years. Natural gas had the best return for 2013.