By William L. Watts, MarketWatch
NEW YORK (MarketWatch) --The Dow Jones Industrial Average and
the S&P 500 rang out 2013 with record closes Tuesday, ensuring
blue chips posted the biggest annual gain in 18 years.
In the end, the Federal Reserve's decision earlier this month to
begin scaling back the size of its monthly bond purchases was the
"gift that kept giving" as Wall Street capped a historically strong
rally with big gains in December, said J.J. Kinahan, chief
derivatives strategist at TD Ameritrade in Chicago.
The S&P 500 (SPX) rose 7.29 points, or 0.4%, to close at
1,848.36 Tuesday. The index ended the year with a 29.6% annual
gain, its biggest yearly jump since 1997.
The Dow industrials (DJI) rose 72.37 points, or 0.4%, to end at
16,576.66, its 52nd record close of the year. The blue chips ended
2013 with an annual rise of 26.5%, the largest since 1995.
The Nasdaq Composite (RIXF) advanced 22.39 points, or 0.5%, to
end at 4,176.59 for its highest finish since September 2000. The
index rose more than 38% over the course of 2013, marking its
biggest gain since 2009.
Speculation around the timing and scale of a Fed decision to
begin scaling back -- or tapering -- its bond purchases was a
dominant theme of financial markets throughout 2013. The prospect
of the Fed scaling back the size of its quantitative easing program
boosted bond yields and temporarily unsettled equity markets this
spring. But by the time the Fed got around to actually pulling the
trigger, announcing in December that it would reduce purchases by
$10 billion a month beginning in January, investors took it in
stride, with equities adding to gains through the end of the
year.
The strength of the 2013 rally caught most market
prognosticators by surprise. And few traders expect the market to
repeat its torrid performance in 2014.
Kinahan said activity is likely to remain subdued this week.
Markets are closed on Wednesday for New Year's Day. Volume may
remain light as investors await the December jobs report at the end
of next week, he said.
The previous year saw investors fretting over numerous events,
from the presidential election to the impending fiscal cliff and
Europe's debt crisis. With the election in the rearview mirror,
policy makers averting a disastrous fiscal mistake and Europe
appearing to be slowly on the mend, the stock market in 2013 likely
captured some of the returns that would otherwise have been
produced in 2012, said Stuart Freeman, chief equity strategist at
Wells Fargo Advisors in St. Louis.
The S&P 500 advanced 13.4% in 2012, according to
FactSet.
While the market's strong finish into the end of the year has
investors worrying that a pullback may be overdue, Freeman sees
little threat for a January pullback. Fourth-quarter earnings are
likely to top expectations and the market seasonally performs well
in the January-to-May period, in part due to flows to retirement
accounts.
Investors in 2014, however, are likely to see a "bumpier ride,"
he said.
"Our position is the year will bring a much more moderate return
and more volatility," Freeman said.
Meanwhile, U.S. economic growth and job creation appear likely
to continue slowly gaining momentum, providing room for increased
capital spending, while a further recovery in Europe will also aid
large-cap firms with heavy international sales exposure, he
said.
Freeman said he expects large-cap cyclicals to take over
leadership in 2014 after outperformance by mid- and small-cap firms
in 2013. Wells Fargo has overweight recommendations on the
industrial, consumer discretionary and technology sectors, while
underweighting utilities and health care.
Economic data provided a little fodder in early action. Stocks
extended gains Tuesday morning after the Conference Board said its
consumer confidence index rose more than expected to 78.2 in
December from a revised 72 in November.
"Rising equity markets, improving labor market conditions,
rising home values and relative stability in Washington has
consumers feeling more optimistic as we turn the corner into 2014,"
said Lindsey Piegza, chief economist at Sterne Agee.
"Of course optimism can only go so far. Eventually that euphoric
feeling will have to be supported by sustainable job and income
growth in order to sustain the heightened growth and spending
levels a +75 confidence reading implies," Piegza said, in a
note.
Earlier, stock-index futures were little budged by a 0.2% rise
in the Case-Shiller home-price index for October. Stocks trimmed
gains slightly but remained in positive territory after the Chicago
Business Barometer, a gauge of business activity in the region,
fell more than expected in December but remained strong
overall.
The index dropped to 59.1% in December from 63% a month earlier.
Economists had expected a reading of 61%. Any reading above 50%
indicates expansion.
Among blue chips, American Express Co. (AXP) rose 1.3%, while
United Technologies (UTX) advanced 1% to lead the Dow higher.
Boeing Co. (BA), followed by American Express (AXP), were the
top Dow performers in 2013, with Boeing posting an annual rise of
more than 81% and American Express gaining nearly 58%.
Shares of streaming movie-rental firm Netflix (NFLX) rose 0.3%
after the firm said Chief Executive Reed Hastings would get a 50%
raise in 2014. Netflix was one of the year's highest fliers,
gaining nearly 298% on the year. Read: Netflix saying goodbye to
Titanic, the Killer Klowns and a pre-Ferris Matthew Broderick.
Shares of Hertz Global Holdings (HTZ) gained more than 10% after
the car-rental company said it would adopt a so-called poison pill
aimed at barring investors from collecting a controlling stake in
the company.
Twitter Inc. (TWTR) was on the rebound after a two-day slide,
rising 5.2% after tumbling more than 5% Monday and 13% on Friday.
The sharp pullback came after a downgrade Friday by Macquarie
analyst Ben Schacher. Twitter, which made its trading debut in an
initial public offering last month, remains up more than 53% since
the beginning of December.
More news from MarketWatch:
2013: The year of bitcoin
Case-Shiller: Home prices up, but boom fading
U.S. and China: When the giants unwind
Subscribe to WSJ: http://online.wsj.com?mod=djnwires