2013 was a year of tremendous resilience in domestic equity markets. The equity markets seemed to ignore the rapid rise in interest rates last spring due to the expected Federal Reserve “Fed” tapering and the government shutdown in the fall. Instead it focused on the improving, stable global economies as domestic stock markets reached record levels. The overriding issue for 2013 was if/when/how much the Fed would pull back on the quantitative easing (“QE”) program by reducing the amount of bond purchases and the unknown consequences to financial markets. The Fed’s announcement in December that they were finally going to reduce monthly bond purchases by $10 billion was met with a muted response by investors as the “taper” had already been priced into equity markets. However, interest rates continued to rise in the fourth quarter, with the 10-year U.S. Treasury interest rate touching 3% in December. We believe that the tapering will be a constant source of concern and volatility for markets in 2014 as the expected and necessary Fed unwinding of quantitative easing will take the world into uncharted territory.
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