6 Macro Themes That Dominated Markets in 2013
Opinion

6 Macro Themes That Dominated Markets in 2013

iStockphoto/The Fiscal Times

It’s that time of year again. No, not just the period where you have to hunt down the perfect gift, survive a surfeit of holiday parties and figure out how to re-gift (once again) that immortal fruitcake. It’s time to look back on what has been and look forward to what lies ahead – and nobody  does either of those better than the folks on Wall Street.

Related: 10 Personal Finance Predictions for 2014

Before you start positioning your portfolio in accordance with the latest recommendations from Wall Street soothsayers, though, let’s review the themes that dominated financial markets in 2013 – under the theory that before you know where you’re going, you have to know where you’ve been.

The Running of the Bulls
Wow. After hearing market strategists sternly remind us to temper our expectations and prepare for a prolonged period of returns topping out in the high single digits, this year has come as a real surprise. We’re on track for the single best year for stocks since 1997, as investors have apparently become comfortable with paying a higher multiple of earnings for many stocks.

Of course, while we did have three years in a row of 20-plus percent returns in the late 1990s, that run ended in grief in 2000. That’s not a prediction – just a reminder that although the market pundits were wrong about 2013, the odds that stocks can do it again in 2014 are, well, minimal. At any rate, this year’s performance is a reason to remember that big macro calls are very often wrong.

The Hot Market for IPOs
Unsurprisingly, the bull market for stocks made for a blockbuster year for investment bankers to bring companies public. IPOs are on track to record their best year in about a decade, though it may even end up the busiest year for IPOs since the dotcom boom went bust. Just as back then, a handful of high growth, high buzz quotient stocks grabbed the lion’s share of the attention, with Twitter’s mammoth offering being the 800-pound gorilla. That overshadowed a more interesting trend: robust demand for familiar household names in prosaic businesses, such as Pinnacle Foods and Hilton Worldwide, which priced its own IPO last week, as well as the stealth boom in biotech IPOs that may continue into 2014.

Washington’s Dysfunctions
Perhaps this was the least surprising phenomenon to afflict financial markets in 2013. Gridlock has, after all, become a depressingly familiar sight inside the beltway: It just hit fresh highs in 2013, with the “sequester” taking effect early in the year, followed by the 16-day government shutdown in October. (A narrow budget deal looks likely to avert a repeat of that experience, at least for now, and may finally improve the confidence levels among both consumers and CEOs.) Still, if we’re not careful, investors will start demanding an extra risk premium to own U.S. stocks and bonds in light of the extreme levels of dysfunction.

Banks Thrive, Even As Storm Clouds Accumulate
Regulators managed (finally) to bring some clarity to at least one financial area in the final weeks of the year. It came in the shape of the final wording of the Volcker Rule, one of the most significant post-crisis reforms that market participants had been awaiting. Alas, part of the new certainty is that banks will be facing a big earnings headwind. Banks have had a difficult but ultimately productive year, with many making strides in putting their regulatory woes behind them and being able to show higher profits, as previous loan loss reserves turn out to be larger than was necessary. But between the strictures of the Volcker Rule and the impact of a drop in mortgage refinancing and lending on profits, 2014 is shaping up to be a much more difficult year.

Emerging Markets Submerge
At the beginning of 2013, investors were willing, even eager, to allocate more money to emerging markets, hoping that economic growth in the wide array of countries covered by this moniker would outpace the admittedly underwhelming GDP growth in the U.S. and the uncertain attempts by Europe to halt its 18-month recession. Whoops. Instead of living up to their name, emerging markets turned turtle; it seems as if their health is more closely tied to those of the developed nations than we had realized, and that everything from political unrest (Thailand) to what is seen as government meddling (Brazil) has eaten into returns this year. The key, it seems, is to become a lot more selective and stop trying to view this motley assemblage of countries and markets as a monolith.

Related: Investing 2014: The Smart Money Is on European Stocks

New New Things
Financial innovation continues to flourish, even with some tough headwinds. Congress and regulators have given the green light to entrepreneurs to use crowd-funding portals in quest of startup capital. Then there’s Bitcoin. Even as law enforcement shut down the “dark” market known as Silk Road, Bitcoin was going increasingly mainstream, with one Forbes contributor living on the alternative currency for a full week. A newly launched fund, SecondMarket’s Bitcoin Investment Trust, has pulled in $65 million plus from investors in the span of only two months, even if its architects appear to have exaggerated or misstated the willingness of Fidelity to hop aboard the Bitcoin bandwagon.

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