Stock investors had good year in 2013, but caution suggested

NEW YORK – Successful stock investors followed some simple advice this year: Don’t worry, be happy.

Next year, though, they will need to temper that rosy approach.

In 2013, investors who blocked out the scary headlines about a possible government default, budget cuts and concerns about when the Federal Reserve would begin to scale back its stimulus did great. The economy wasn’t robust, but it wasn’t weak either. Earnings grew, even if companies achieved them by cutting costs rather than increasing sales. And the Fed gave the market a year-end bonus by keeping short-term borrowing costs near zero, even after dialing back its program to hold down longer-term rates.

Final tally: Stocks are up more than 28 percent.

The worrier’s ultimate refuge – cash, bonds and gold – actually caused even more heartburn. Havens like bonds are down this year: The biggest category of bond funds by assets, intermediate-term bond funds, has lost an average of 1.5 percent. Gold is having its first down year since 2000, having declined 27.7 percent.

Market strategists, on average, see more modest growth for stocks in 2014. The S&P 500 could rise 5 to 7 percent. Bonds should continue to struggle.

Here are the positives from 2013 and some tempering thoughts for 2014.

2013 highlights

SMALL CAPS WERE BIG: Here’s where the stock optimists really shone. The Russell 2000, an index that tracks smaller, riskier stocks, is up nearly 37 percent, more than the Dow and the S&P 500.

STUNNING DEBUTS: IPOs are risky and also for positive thinkers. And they surged this year. The average IPO stock rose almost 35 percent this year, outperforming the S&P 500, according to data from Renaissance Capital. In total, companies sold $55 billion of stock in 2013, an increase of 29 percent from 2012.

NO HOLDING BACK: Another streak for bulls. The S&P 500 has gone 27 months without a downturn of 10 percent or more. That compares with an average streak of 18 months between such declines, according to S&P Capital IQ.

2014 predictions

WATCH OUT FOR CROWDS: After being burned during the financial crisis, many investors have stayed away from this five-year bull market.

Professional investors worry that the average Joe will now try to make up for lost time in 2014. If that happens, the demand could inflate prices beyond what earnings justify.

WHAT GOES UP, MUST COME DOWN: Goldman Sachs analysts see a 67 percent chance that stocks will decline 10 percent or more in 2014, which is known as a stock market “correction.” The S&P 500 is up nearly 40 percent since the stock market’s last major downturn in October 2011.

LOWER EXPOSURE: 2014 is not looking good for bond investors. With the Fed starting to pull back on its bond purchases in January, one of the biggest buyers of bonds for the last year will slowly slip out of the market. That could send bond prices lower.