January 1, 2014

The fourth quarter of 2013 was an exceptionally strong quarter in terms of fundamental economic conditions. Minor concerns over peripheral economic indicators, technical market indicators, and headline news were offset by strong core indicators. Accordingly, the S&P 500 index experienced gains in excess of 9%.

Entering the fourth quarter, an imminent US government shutdown dominated news headlines. As the government shut down, the S&P 500 reacted with a week or so of declines. Soon, however, our global economic indicators – which had continued to strengthen as the fiasco in Washington raged – regained headline traction, and the market reversed into gains.

With several minor exceptions, economic strength continued throughout the quarter. Two notable instances caused us minor concern: first, at the start of November, the ECB cut interest rates due to unexpectedly poor inflation, and the yield on the 10 Year US Treasury Bill jumped simultaneously. This turned out to be nothing more than a hiccup. Second, several technical market indicators showed flashes of increased risk. This, too, turned out to be a false alarm, though some of these risks carried over into the new year, and we continue to monitor them.

Other core data such as manufacturing, credit markets, and crude oil prices became stronger or remained strong as the quarter progressed. The S&P 500 followed suit, and we experienced an equity bull market strongly supported by economic fundamentals.

The following indicators are representative of the overall economic climate in the fourth quarter of 2013.