Looking back on 2013, my first impression is that it was a year in which, at least from an economic and investment perspective, most things went right.
From an Economic Perspective: A year ago, with the fiscal cliff looming, I expected another slow growth year for the U.S. and global economies; low inflation; and a modest rise in yields. For the most part, the economic landscape evolved as I expected.
While the U.S. economy surged in the third quarter, end-user demand remained muted, stuck at around 2%, while inflation remained low, arguably too low. Long-term yields rose around 100 basis points, albeit not in a clean or orderly fashion.
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.
From a macro perspective, the two biggest surprises were that inflation fell even further than I expected, and the economy held up relatively well, despite massive fiscal drag.
From an Investment Perspective: Given the economic backdrop I expected of slow growth, low inflation, and modestly higher rates, my major investment calls in 2013 were to consider overweighting equities, credit and emerging markets, and to consider underweighting Treasuries, defensive sectors such as utilities, and gold. How did the year compare to my expectations?
The equity call proved correct as 2013 was a great year for many stock markets, although full disclosure: Thanks to easy money and retail investors rediscovering their appetite for risks, stocks did much better than I expected they would.
Within stocks, the record was more mixed. A yen-hedged position in Japan proved a good call, with that market up more than 50% in 2013. However, I completely missed on emerging markets. While the stocks were cheap, emerging market growth slowed, not just in China but also in Brazil, India, and even in previously high-flying Mexico.
Fortunately, some of my equity underweights did better. In particular, my call to underweight utilities was the right call, as this “bond-market proxy” was the worst performing sector in 2013 (although in a year like 2013, even the worst performing sector is up double digits).
My fixed income calls proved generally correct, as bonds massively underperformed stocks and investors did well if they focused on high yield, rather than Treasuries and Treasury Inflation-Protected Securities, which had an abysmal year. Municipals, which I liked going into 2013, also struggled, but they did manage to outperform Treasuries.
Finally, in the spring I suggested that after a phenomenal 13-year run, gold was vulnerable to rising real interest rates and I began advocating an underweight to the precious metal. Since I initiated my call in May, gold has fallen from roughly $1350/ounce to below $1,200.
Looking back is always a humbling experience, but I do take one bit of solace as we head into 2014. Hopefully, next year will be one in which every conversation does not begin and end with the word “tapering”. Happy New Years.