US Stocks Lead the Way on Fed Tapering & Strong GDP Report

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Market Digest – Week Ending 12/20

The Fed announced it will reduce monthly bond purchases from $85 billion to $75 billion. It also said most members support keeping short term interest rates near zero through at least 2014. Meanwhile, Q3 GDP was revised upward to 4.1%. The S&P 500 finished the week at a new record high. International stocks rose, but at a slower pace. Bonds and gold fell.

Weekly Returns:

S&P 500: 1,818 (+2.4%)
FTSE All-World ex-US: (+1.1%)
US 10 Year Treasury Yield: 2.89% (+0.03%)
Gold: $1,202 (-2.8%)
USD/EUR: $1.367 (-0.5%)

Major Events:   

  • Monday – Rumors circulated that Sprint is working toward a possible bid for T-Mobile USA.
  • Monday – A federal judge said the National Security Agency’s bulk collection of phone records most likely violates the Constitution’s ban on unreasonable searches.
  • Wednesday – The Federal Reserve announced it would reduce its $85 billion monthly bond-buying program by $10 billion per month. It also said most members support keeping short term interest rates very low until at least 2015. Stocks rose.
  • Wednesday – Bitcoin values fell below $550, less than half the $1,200 trading level last week, after BTC China halted deposits in Chinese Yuan.
  • Thursday – Target said approximately 40 million credit and debit card accounts used by customers between November 27 and December 15 may have been breached.
  • Friday – Q3 US GDP was revised upward to 4.1%. Consumers spent more on services and businesses increased spending on software and inventory rebuilding.

Our Take:

This week was a near-perfect microcosm of the year. US stocks were propelled higher by more accommodative Fed policy (relative to expectations) and stronger than expected US economic growth. International stocks also rose, but at a slower pace. Investors again dumped gold and bonds. Looking back, it is not surprising that US equities have shined this year, but the magnitude of outperformance has been notable.

Five full years after the peak of the financial crisis, 2013 was the year the world definitively emerged from recession. The US has the most innovative, resilient economy in the world, and it led the way. This week’s GDP revision showing growth over 4% put an exclamation point on it. Meanwhile, Europe is just now crossing into positive growth territory and China’s growth is decelerating as bad loan concerns increase.

But again, this is backward looking. Money has been flowing into dollar based assets because they feel safer, but fundamentals are starting to look more attractive overseas. The US has some structural advantages, but that doesn’t necessarily translate into “better” investment opportunities. US versus foreign outperformance cycles tend to last several years, so we wouldn’t be surprised if the US continues to lead in 2014. But over the next five years international may prove to be the star. For those who believe in rebalancing portfolios, it may feel wrong to move money back into international assets, but the right thing to do rarely feels right.

 

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Craig Birk, CFP®

Craig Birk, CFP®

Craig Birk is a member of the Personal Capital Advisors Investment Committee. He also serves as Vice President of Portfolio Management. Prior to Personal Capital Advisors, he was an integral leader within the portfolio management team at Fisher Investments. During Craig’s time there, the company increased assets under management from $1.5 billion under management to over $40 billion. His responsibilities included risk management, portfolio implementation oversight, and management of all securities and capital markets research analysts. Mr. Birk graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.

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