Equity markets not only soared in 2013, but did so with surprisingly little volatility. A closer look at the S&P 500 through the year reveals some interesting facts: 1) The CBOE Implied Volatility Index (VIX) averaged just 14.2 over the course of the year; far below the average of 20.2 since its inception in 1990; 2) The VIX surpassed its long-term average of 20.2 on only two days during the year; and 3) The S&P retreated more than 5% only once during the year; from May 21 to June 24 when it dropped 5.75% from peak to trough after the first “taper” announcement.
Quarterly Commentary 2013
Geopolitical events (Syria) and U.S. political discord (government shutdown and debt ceiling impasse) were major topics for investors during the 3rd quarter; however, more salient and positive economic news such as the first positive European GDP reading in 18 months (2Q13: +0.3%) and an upward 2Q13 revision for U.S. GDP (+2.5% from +1.6%) kept financial markets on firm footing.
The 2nd quarter news flow was dominated by the May 22nd release of Federal Reserve meeting minutes indicating that a “tapering” of bond purchases (quantitative easing) might begin as soon as July. The “taper” comment sent equity markets tumbling from their all-time highs and bond yields rose to levels not seen in more than a year.
The US economic picture continued to improve with a few key factors showing strength. Unemployment remained elevated, yet firmly below 8%. The housing recovery continued to gather momentum, with homeowners and investors enjoying year-over-year price increases in excess of 10% in many parts of the country. Consumer confidence continued to recover, likely in response to the aforementioned strength in employment and housing prices. Inflation remained benign, with the 12-month period, as of 5/31/2013, showing inflation rates dropping once again to 1.4% for “headline” CPI and 1.7% for “core” CPI (excludes food and energy).
Investor focus shifted in the 1st quarter from domestic policy issues such as the fiscal cliff, the budget debate and sequester, to renewed concerns of turmoil abroad, particularly in the Eurozone. The mid-February announcement that banks in the Mediterranean island state of Cyprus were insolvent and would need a bailout set off investor concerns around the world. The news cycle was very fluid and the status of the bailout seemed to change hourly. Initially it appeared that the bailout terms would include "haircuts" of 7-10% for all depositors. Pictures of bank runs in Cyprus and "bank jogs" in other troubled areas of southern Europe, specifically Italy and Spain, were painted by critics of central bank policy makers with the thinly veiled insinuation that "if it happens over there, it can happen here." Ultimately, the sanctity of insured deposits prevailed and accounts up to €100,000 were protected, while large depositors suffered write-downs of as much as 30% in exchange for bank equity. As of the end of the quarter, it seemed as though the Cyprus situation was reasonably well contained and that the country would remain a member of the Euro; however, the message appears to have been sent that exit from the unified currency would be considered for countries unable to keep their fiscal house in order.