Wrapping up the year in one post is tough, but let’s give it a try. Although the financial industry likes to think that the center of the universe is located somewhere between lower Manhattan and the hedge fund enclave of Greenwich, CT, most of 2013 was dominated by events in Washington DC. Fiscal Cliff: The year started with a cliffhanger Congressional vote that occurred 90 minutes after the January 1 “fiscal cliff” deadline. The agreement raised roughly $600 billion in taxes over 10 years, by increasing contributions to the Social Security program from 4.2 percent, back to 6.2 percent on earnings up to $113,700 in 2013 and by increasing taxes for wealthy Americans. Individuals who earn more than $400,000 and couples who make more than $450,000 saw their tax rates increase from 35 to 39.6 percent. Capital gains and dividend rates increased to 20 percent from the 15 percent for the same income thresholds and health care reform levied a new surtax of 3.8 percent on capital gains for wealthy Americans.
Sequestration: The genesis of the automatic $1.2 trillion in spending cuts, known as “sequestration,” occurred in August 2011, when lawmakers were battling over raising the debt ceiling. At the time, there was an agreement to form a “supercommittee,” which would attempt to avert across-the-board cuts to defense and non-defense programs. Alas, the committee failed and despite a two-month delay, on March 1st, the government cut $110 billion from its budget.
While the anticipation of the cuts reduced first quarter growth to a measly 1.1 percent annualized pace. As the year advanced, Gross Domestic Product advanced to 2.5 percent in the second quarter and a sizzling 4.1 percent in the third. The economy is expected to expand by about 2.25 percent for the year, a bit ahead of the worrywart predictions, but still one percent slower than the post-World War II average.
Bernanke’s Taper Talk: During Fed Chairman Ben Bernanke’s May 22nd testimony on Capitol Hill, he said that the central bank could taper its $85 billion monthly bond-buying program, if the economy were to perk up. The stock and bond markets fell on the suggestion that the central bank would remove stimulus from the economy, though the stock market recovered and eventually moved higher.
However, the bond market suffered a lasting blow: the yield on the 10-year treasury soared from 1.62 percent in the beginning of May to a two-year high of nearly 3 percent and pushed down the value of bonds. The spike in interest rates pushed up the cost of mortgages. The average rate on a thirty-year conventional mortgage shot up from 3.5 to 4.5 percent, causing a 70 percent drop in refinancings.
The announcement of the dreaded taper finally occurred at the last Federal Reserve policy meeting of the year. As of January, the central bank will curtail its bond buying by $10 billion to $75 billion. Investors took the news in stride and bought stocks.
Government shutdown/Debt Ceiling: Budget fights are like clockwork, but this year’s drama partially shutdown the government from October 1 through October 16. Lawmakers finally agreed on a deal to fully reopen for business and to raise the debt ceiling, averting what the Treasury Department said would be an unprecedented and potentially catastrophic default.
Housing Recovery: 2013 was a big turning point for the U.S. housing market. The combination of low interests rates and bargain-basement prices brought big investors into the fray. The result was a 12 percent increase in home prices this year and a big uptick in activity.
Stocks Soar: The Federal Reserve’s low interest rate and bond buying program made stocks the go-to asset class for investors. The central bank announced the current round of bond buying (“Quantitative Easing” or “QE3”) in September of 2012. Since then, the S&P 500 has soared and is up over 28 percent this year alone (as of the time of this writing).
And just think, we get to do it all over again in 2014!