Stocks and 2013: A profitable year to remember

5:52 PM, Dec 31, 2013   |    comments
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NEW YORK (USA TODAY) – The stock market -- still rising in the last hours of trading left in 2013 -- is on track to wrap up its best year since 1997, showering investors with a 29% gain in a record-breaking run that might finally have convinced investors scared off by the 2008 financial crisis that stocks remain a viable investment alternative.

"It was a great year, one for the record books," says Alan Skrainka, chief investment officer at Cornerstone Wealth Management.

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Nothing, it seemed, could slow the stock market's profitable run in 2013. The Boston Marathon terrorist bombing didn't dent investors' resolve. Nor did political turmoil in Egypt. Or a near U.S. military confrontation with Syria.

Similarly, a sharp spike in yields on U.S. government bonds and rising anxiety over an eventual shift to a less market-friendly Federal Reserve policy couldn't spark a stock market downturn, either. Investors also shrugged off electronic glitches at stock exchanges, ongoing economic worries, and a government shutdown.

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The year "saw a downsizing of fear," says David Kelly, chief global strategist at J.P. Morgan Funds. "A lot of people's fears diminished, and that allowed money to come back into stocks."

Wall Street historians had a busy year as the record books had to be rewritten.

With just one trading day left in 2013, the 117-year-old Dow Jones industrial average, which was powered by the Fed's easy-money policies and an improving economy, has notched 51 record closes, including a fresh all-time high of 16,504.29 on Monday. It is up 25.9%, on track for its best annual performance since 1996.

The benchmark Standard & Poor's 500 index notched 44 new highs, and is up 29.1% at 1841.07 and on track for its best gain in 16 years. The Nasdaq composite performed like it did in the go-go 1990s, soaring 37.6% to 4154.20, a level not seen since September 2000.

The small-cap Russell 2000 also hit new-high territory in 2013, gaining 36.6%. All told, the stock market has seen a paper gain of roughly $5.3 trillion, according to Wilshire Associates.

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Along the way, stock investors got a few breaks.

To start the year, squabbling Democrats and Republicans signed off on an 11th-hour deal that helped the economy avert the worst of the "fiscal cliff," a mix of government spending cuts and tax hikes. And despite fears that the Fed would dial back on its market-friendly bond-buying stimulus program, the central bank held off and said it won't start phasing out its stimulus until January 2014, a delay that enabled the economy and job market to gain steam and U.S. companies to post record earnings.

The nation also averted war with Syria and sidestepped other geopolitical landmines in places such as Iran and Egypt.

With fears receding, investors gained confidence and bid up stock prices. They were willing to pay more for each dollar of a company's earnings, resulting in rapid price appreciation. A key valuation metric, the price-to-earnings ratio, or P-E, of the S&P 500 swelled from 14 times companies earnings over the past 12 months at the start of 2013 to nearly 17 times by year's end, according to Terry Sandven, chief equity strategist at U.S. Bank Wealth Management.

"We are ending 2013 in a good place," says Sandven. "The global economy is in slow-growth mode. Interest rates are low. Inflation is contained. And corporate earnings are rising. Typically, that presents a favorable environment for stocks."

Nobody expected the big gains in 2013, "proving you can't time markets," adds Kelly.

How sweet it was on Wall Street

How the major U.S. stock indexes performed as of Dec. 30:

Standard & Poor's 500: 29% gain (Best since 1997)

Dow Jones industrial average: 26% gain (Best since 1996)

Nasdaq composite index: 38% gain (Best since 2009)

Russell 2000: 37% (Best since 2003)

Source: USA TODAY research; Bespoke Investment Group

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