MarketView for December 31

Summary

Stocks closed out their best year in more than 15 on Tuesday, rising modestly on a strong consumer confidence reading that kept 2013's upward bias intact to the end. More specifically, the Dow Jones Industrial Average ended the year up 26.5 percent, its best year since 1995, while the S&P 500 gained 29.6 percent in its best annual performance since 1997. The Nasdaq was up 38 percent, its best year since 2009. World equity markets ended at six-year peaks on Tuesday, while benchmark bond yields posted their first annual rise since 2009.

Ultra-easy monetary policies and an improving economic outlook worldwide led to a stellar year for stocks. Equity strategists see the gains continuing into 2014 as economic growth improves even as the Federal Reserve steadily trims its bond-buying stimulus.

More than 450 of the stocks in the S&P 500 index ended the year higher, the most since S&P started collecting that data in 1980. Japan's Nikkei .N225 ended the year up 56.7 percent and European shares .FTEU3 gained 16 percent. MSCI's all-country world equity index .MIWD00000PUS was up 0.22 percent at 408.33, its highest level since late 2007. It has gained 20 percent this year.

The Barclay’s aggregate Index of investment-grade bonds ended with its worst year since 1994, as interest rates rose in anticipation of reduced Fed stimulus and higher-yielding stocks attracted more investment flows.

Assets favored by investors in economic downturns took a beating in 2013, with falling prices driving top-rated U.S. and German bond yields to near their highest levels in around two years and gold limping toward its worst annual performance in three decades, losing more than 27 percent.

The yield on the 10-year Treasury note, which sets the standard for global borrowing costs, hit 3 percent, up from 1.75 percent at the start of the year, but is seen rising to only 3.35 percent in 2014. The 10-year note was yielding 3.02 percent on Tuesday.

European stocks are expected to hit new highs in 2014, while Chinese, U.S. and other major stock markets are also seen posting solid gains.

Emerging markets have been a noted exception to the rally in equities. MSCI's EM Index fell 5 percent in 2013 on worries that cuts in global monetary stimulus could expose economic imbalances and as funds return to the rich world.

Russian stocks hit eight-day lows after two deadly attacks in less than 24 hours that raised security fears ahead of the Winter Olympics.

The euro ended 2013 close to its highest level in two years against the dollar. It is expected to reverse its upward trend next year as the continued soft stance of the European Central Bank contrasts with the Fed's.

On Tuesday, the single currency inched down to $1.3756, still up more than 4 percent for the year. The dollar was slightly higher against the yen at 105.32, posting its biggest annual gain against the yen in 34 years, with the Japanese currency hit by the Bank of Japan's money-printing.

The easing of the euro zone crisis and signs of a pick-up in economic activity even in the bloc's weakest states have offered strong support to the euro and brought Italian and Spanish debt yields down to just over half their crisis peaks.

In the oil market, domestic oil futures ended down 87 cents to $98.42.

An Initial Look at the New Year

World stocks were ending 2013 close to six-year peaks on Tuesday and benchmark bond yields were poised for their first annual rise since 2009 as investors anticipated a further pick-up in global growth.

Ultra-easy monetary policies and an improving economic outlook have given equities a vintage year in 2013. Wall Street was on track for its best year since 1997 with a 29 percent gain, while Japan's Nikkei ended up 56.7 percent and European shares gained 16 percent.

Assets favored by investors in economic downturns took a beating in 2013, with falling prices driving top-rated U.S. and German bond yields near their highest levels in around two years and gold limping towards its worst annual performance in three decades.

With bets that the economic recovery will continue even as the Fed steadily trims its bond-buying stimulus and that the euro zone will take more steps towards overcoming its debt crisis, investors look for more of the same in 2014.

Meanwhile, European stocks are expected to hit new highs in 2014, while Chinese, U.S. and other major stock markets are also seen posting solid gains. Gold is expected to remain depressed, while benchmark bond yields are seen rising only slightly.

Inflation in major economies is expected to remain low, while the ECB and the Fed have pledged to keep interest rates low for a prolonged period. The yield on the 10-year Treasury note, which sets the standard for global borrowing costs, is up almost 3 percent from 1.75 percent at the start of the year, but will probably only reach the 3.35 percent level in 2014.

Emerging markets have been a noted exception to the rally in equities. MSCI's EM Index fell 5 percent in 2013 on worries that cuts in global monetary stimulus could expose economic imbalances and as funds return to the rich world. Russian stocks hit eight-day lows after two deadly attacks in less than 24 hours that raised security fears ahead of the Winter Olympics.

The euro is set to end 2013 close to its highest level in two years against the dollar, but will likely reverse its upward trend next year as the continued soft stance of the ECB contrasts with the Fed's.

The easing of the euro zone crisis and signs of a pick-up in economic activity even in the bloc's weakest states have offered strong support to the euro and brought Italian and Spanish debt yields to just over half their crisis peaks.

In recent days, a rise in money market rates due to thin year-end liquidity has given the shared currency extra impetus, but there are some expectations the ECB may react with new long-term liquidity injections into the banking system if that continues in 2014.

In the oil market, Brent crude has held above $111 per barrel, supported by slashed Libyan output and violence in South Sudan.

Hopes for global growth meant copper traded around four-month highs, while aluminum dipped after climbing to two-month highs last session. Zinc looked set on Tuesday to be this year's best-performing industrial metal.

Home Prices Show Meager Gains

Single-family home prices rose less than expected in October but posted their strongest annualized gain in more than seven years. According to the S&P/Case Shiller composite index of 20 metropolitan areas gained 0.2 percent in October on a non-seasonally adjusted basis, versus 0.7 percent in September. On a seasonally-adjusted basis, prices were up 1 percent.

Prices in all 20 cities rose on a non-seasonally adjusted yearly basis, led by a 27.1 percent gain in Las Vegas and followed by a 24.6 percent increase in San Francisco.

Compared to a year earlier, prices were up 13.6 percent, exceeding expectations of 13 percent and marking the gain the strongest since February 2006, which saw an increase of 13.8 percent.

Housing prices have been rising since early 2012, and a rebound in the sector has helped the economic recovery.