Phoebe Venable: Investors eye 2014 hopefully

Stock investors are surely hoping that 2014 will be as good as 2013.

There is no reason to be anything less than excited about receiving your year-end investment statements, which will arrive soon. Stock investors had their best returns in 16 years.

The benchmark Standard & Poor’s 500 index ended the year almost 30 percent higher than it began, or 32.4 percent higher with dividends added to the return. Not since 1997, in the midst of the technology bubble, has the index had a better year than it did last year. The Dow Jones Industrial Average jumped 26.5 percent and the NASDAQ closed the year with an impressive return of 38.2 percent.

The bull market delivered gains across the board. All 10 industry segments of the S&P 500 were positive for the year. Eight of the 10 industry segments rose by more than 20 percent last year. The best-performing group was consumer discretionary stocks, which includes retailers, restaurants, entertainment companies, casinos and other companies that are considered non-essential consumer services. The two best performers in this broad category were Netflix and Best Buy.

The two industry segments that did not post returns above 20 percent were utilities (8.8 percent) and telecommunications (6.5 percent).

Almost equally spectacular was the Dow. This widely cited index comprised of 30 blue-chip stocks listed on the New York Stock exchange had 17 of those 30 component stocks hit an all-time high share price last year. International Business Machines was the only stock in the Dow that declined last year. The Dow logged its best year since 1995.

While stock investors had a good year, bond investors experienced mostly negative returns. Longer-term bonds and high-quality bonds lost ground along with most interest-rate-sensitive segments. Municipal bonds and high-quality corporate bonds were down about 2 percent, while long-term US Treasury bonds lost 13 percent. Investors who took on the risk of high-yield bonds (sometimes called junk bonds) finished the year with a return of about 7 percent, the top return among the domestic bond categories. Also finishing the year in negative territory was gold. Gold was down 28 percent, its worst year since 1981.

From 2007 to 2012, bonds provided somewhat steady returns, 5 percent to 8 percent per year. In the years to come, however, these returns will be hard to achieve. Part of the reason for this outlook is the absolute low level of yields.

With high-quality bond yields in the 2 percent to 3 percent range, it is difficult to absorb price declines and maintain a positive return. Unless there is an unexpected slowdown in our economic growth, it is unlikely that bonds will offer much upside in 2014.

For stock investors, the outlook is much more positive. A year ago, investors faced a soft housing market, the risk of the U.S. defaulting on its debt, a fiscal cliff, spending cuts from the sequestration and so on. Entering this year, we still face the issue of fiscal responsibility and ongoing stalemates in Washington, D.C., but the U.S. economy turned out to be much more resilient than was presumed by many at the beginning of 2013. Early in 2013, some of the economic news was good simply because it was better-than-feared. But as the year progressed, it became clear that the economy was strengthening.

U.S. gross domestic product grew 4.1 percent in the third quarter, an impressive and healthy rate of growth. The unemployment rate has been slowly coming down. The housing market has been steadily improving even though mortgage rates are rising. The Fed announced its plan to taper monthly purchasing of U.S. Treasury bonds and mortgage securities without the capital markets crashing. The U.S. consumer has less debt and more savings. While our economy is certainly not perfect by anyone’s measure, it is getting better. All of these things point to an optimistic outlook for equity investors in 2014.

Now is a good time to meet with your financial advisor and make sure your portfolio is constructed to take advantage of the market opportunities while achieving your short-term and long-term goals.

Phoebe Venable is president and COO of CapWealth Advisors LLC. Her column on women, families and building wealth appears each Saturday in The Tennessean.