December market review: Wrapping up a strong year for equities

By Mike Smith, Russell Investments

December put a bow on what turned out to be both a strong fourth quarter and year for equity asset classes. U.S. equity1 posted the best asset class results for the month, quarter, and year ending December 31, 2013. The Russell 3000® Index’s 10.1% return in the fourth quarter provided an appropriate bookend for its 11.1% return in the first quarter of the year. Unlike earlier quarters, U.S. large cap stocks nosed out U.S. small cap stocks for market leadership in the fourth quarter, with the Russell 1000® Index returning 10.2% and the Russell 2000® Index returning “only” 8.7%. Developed international stocks also finished the year in impressive fashion: the Russell Developed ex-US Large Cap Index returned 5.8% during the quarter, adding to a 21%+ return for the year. All in, developed markets global equity markets, as measured by the Russell Developed Large Cap Index, were rewarded with an 8.1% quarter and a 27.4% 2013.

Capital market returns chart

Sources: US Equity: Russell 3000 Index, Non-US Equity: Russell Developed x-US Large Cap Index, Emerging Markets: Russell Emerging Markets Index, US Bonds: Barclays Aggregate Index, Global REITs: FTSE EPRA/NAREIT Developed Real Estate Index, Commodities: DJ UBS Commodities Index, Balanced: 30% US Equity, 20% Non-US Equity,5% EM,35% Bonds, 5% REITs, 5% Commodities. Index returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

In contrast, the rest of the capital markets generally did not fare as well during the last quarter or the year. Emerging markets equities were probably the biggest disappointment for the year as much was expected of them going into 2013. Bonds finished the year out much as they performed for the majority of the other nine months: the Barclays U.S. Aggregate Bond Index posted a -0.6% return for December, -0.1% return for the quarter, and -2.0% return for the year. Rising rates also impacted global REITs: the FTSE EPRA/NAREIT Developed Index returned -0.7% during the fourth quarter. Commodities posted a solid December, but it was not enough to generate a positive return for either the quarter or the year, as the Dow Jones UBS Commodity Index was down -1.1% during the quarter and -9.5% for the year. Commodities were hurt by concerns about rising rates and concerns about the direction of economic growth in the developing markets.

Global Equity Markets Reaped Big Returns in 2013

Developed market equities had a historically strong year in 2013. Major indexes have been tracking global equity performance since 1970 and 2013’s return of 27.4%2 was the seventh best calendar year result in that 44-year period. Even more dramatic was the spread between global equities and fixed income. The 29.3% difference between these two asset classes was the second largest spread since 1970, trailing the largest calendar year difference by only 40 basis points (0.4%).3 For perspective, the average annual spread between global equities and bonds since 1970 has been 4.1%. The combination of improving economic expectations and rising interest rates created an environment for equity markets to excel and bond markets to struggle.

Chart growth of dollar 2013

Source: Global Equity represented by Russell Developed Large Cap Index; Bonds represented by Barclays U.S. Aggregate Bond Index. Index returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

The Bottom Line

Developed equity markets delivered historically strong results and drove double digit market returns in 2013. Unfortunately having exposures to additional diversifiers, such as fixed income and commodities, wasn’t as clearly beneficial. Such disparity can tempt investors to question the value of being invested in “these other asset classes.” Of course, markets can turn quickly – and that’s when “these other asset classes” can be helpful.

1Represented by the Russell 3000® Index

2 Represented by Russell Developed Large Cap Index

3 Global Equities represented by Russell Developed Large Cap Index and Fixed Income represented by Barclays U.S. and Aggregate Bond Index.

Diversification does not assure a profit and does not protect against loss in declining markets.

Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.