Blog : Looking Back on 2013

by Ed Zwirn on December 27th, 2013

The stock market in the United States made many investors rich this year, with the Dow Jones Industrial Average up nearly 26% as of Friday. This benchmark index, which consists of 30 higher-priced stocks, started out the year with a bull session, gaining over 300 points in its first session on Jan. 2 as investors rushed in to buy stocks with the advent of the New Year.

And the broader market, including penny stocks, has participated in this gain. The 2,451 stocks in the NASDAQ Composite Index saw a rise of 37.7% this year. The small-cap Russell 2000, widely used by investors to track the progress of penny stocks, is as of this writing up 36.7%.

In tandem with the stock market, the year has seen evidence of the U.S economy making overall, and accelerating, progress. Of the headline figures, the overall economy, as measured by Gross Domestic Product, was announced on Dec. 20 to have risen 4.1% in Q3. As pointed out in a recent penny stock blog, that is the strongest reading since the economy expanded by 4.9% in Q4 2011 and well above the 2.5% gain in the second quarter, the 1.1% growth seen in Q1 and the 0.1% GDP rise seen in Q4 2012.

The Q3 increase was a solid one, from an economic standpoint, driven in part by a 2.5% growth in sales, the largest gain since the sales component of GDP rose 3.4% in Q4 2011. As I earlier pointed out in my penny stock blog, if this trend holds (and that is a big 'if'), we could be in for a much better year than the 2-2.5% growth hitherto predicted by economists for 2014.

This growth has been accompanied by little or no inflation. In a recent penny stock blog, it was noted that in December, the Bureau of Labor Statistics announced that the Consumer Price Index had held absolutely steady in November. The closely watched "core" figure, which excludes food and energy and so is held to be a more accurate indicator of underlying "monetary" inflation, rose 0.2%. The producer price index, a more leading indicator, fell 0.1% in November, after falling 0.2% in October, with the core rising 0.1%, a slowdown from October's 0.2% spike.

Unemployment rate announcements saw steady but anemic progress from the 7.7% rate seen at the beginning of the year. The unemployment rate peaked at 10% in October 2009 and has been falling ever since and the current rate of 7% is the best score seen since the 6.8% recorded for November 2009.

The government shutdown confused the unemployment picture in October. Workers who were furloughed due to the shutdown should have reported themselves as unemployed, but many of them were confused with the question and listed themselves as simply out of the labor force, artificially lowering the labor force participation rate. Those workers "returned" to the labor force in November, boosting both the labor participation rate and the total employed.  The strong payroll gains seen in November were the result of these workers returning to their federal jobs at the same time the private sector posted real job gains.

Real estate was also a strong component of the U.S. economic recovery. As of September, the S&P/Case-Shiller 20-city home price index was up 13.3%, propelling average home prices in the U.S. to levels not seen since mid-2004. Prices for homes have risen in all 20 index cities this year, although there is some evidence pointing to a slowdown in the rate of increase for many key markets.

But the real estate recovery has yet to make up for lost ground. While home prices are up 23.6% from the lows seen in March 2012, both the S&P/Case-Shiller 10- and 20-city indices are still off about 20% from the highs seen at the height of the real estate runup in June/July 2006.

The policy of the U.S. Federal Reserve also had a key impact on stocks this year, with the central bank having pumped $1.02 trillion into the economy in 2013 through monthly purchases of mortgage-backed and Treasury bond purchases to the tune of $85 billion. This has had not only the expected beneficial effect on the real estate market, it has also boosted the market for everything from penny stocks to blue chips by keeping interest rates low and increasing the appetite for risk on the part of investors seeking decent returns.

In March, the Fed, which had originally said it would start to dump these bonds at around that point in time, backtracked by saying it would probably keep buying them and hold them until they mature. This "quantitative easing" stimulus program, which has been in effect since June 2011, has undoubtedly played a major part in contributing to the bull market of 2013.  It is therefore noteworthy that the Fed's Dec. 18 policy announcement, which announced a $10 billion reduction in this monthly stimulus starting January, prompted a pronounced market rally by eliminating much of the uncertainty regarding Fed policy going forward.

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