Overview
Standoffs, sequestration, shutdown, and suspense in Washington supplied the wall of worry that equities markets are said to be so fond of climbing. And climb it they did. The Dow, S&P 500, and small-cap Russell 2000 explored record territory for much of the year. Investors spent most of 2013 toggling between rejoicing at the lack of bad economic news and worrying that good news would prompt the Federal Reserve to start cutting its support. However, the Fed delayed action, first to assess the economic impact of the sequester budget cuts imposed by 2012's fiscal-cliff detour, and then to avoid aggravating concerns over the U.S. debt ceiling showdown and the 16-day government shutdown.
All the uncertainty rattled markets worldwide, particularly emerging markets, during the summer. However, headlines about potential sovereign default abroad became more scarce as the eurozone emerged from the longest recession in its history despite record 12% unemployment. Meanwhile, China announced plans for economic reforms designed to reduce state monopolies and open up the banking system. In the United States, regulators finally adopted the Volcker rule, which will limit Wall Street banks' ability to speculate with their own money, and Janet Yellen prepared to replace Ben Bernanke as Fed chairman. Meanwhile, despite the confusion in Washington, solid corporate profits helped reassure investors.
By year's end, the S&P 500 had nearly tripled since its March 2009 low. However, financial markets must now begin navigating unfamiliar terrain as the Fed begins to taper its support. With a fresh round of debt ceiling debates on the horizon, that wall of worry isn't likely to shrink in 2014; the question is whether investors will be willing to climb it--and if they are, how far they might go.