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Weekly Stock Market Update—April 11, 2013
By Steve Scranton, SVP, CFA
Chief Investment Officer

Weekly Stock Market Update

Volatility was the theme this week, with 4 out of the 5 days producing gains or losses of close to 1% in the major indices (i.e.; Dow Jones Industrial Average and S&P 500). Stocks moved sharply lower on Monday, as last week’s wave of profit taking continued. The sell-off was led by some high-valuation momentum and internet/social media stocks, including Amazon.com (AMZN), Netflix (NFLX), Facebook (FB), Yahoo! (YHOO), and Google (GOOG).

After stabilizing on Tuesday, stocks moved up strongly on Wednesday. Minutes from the Federal Reserve’s (Fed) most recent policy meeting showed that its members were unanimous in wanting to change the thresholds they have been using to telegraph future policy changes. It was also noted that the Fed wants to avoid the perception of becoming less accommodative than it has been in supporting the economy. Equity investors breathed a sigh of relief, interpreting the Fed’s comments as meaning that it is not as eager to raise interest rates as has recently been feared. Wednesday’s rally was short-lived, however; stocks reversed course and fell sharply again on Thursday and Friday. The start of earnings season brought some disappointing first quarter results. News that the prior week’s initial jobless claims moved lower was ignored as more focus was placed on corporate earnings results and as investors took profits in higher risk stocks that have become quite expensive.

Earnings season got under way this week, with a small handful of companies reporting results. The pace will heat up next week, with over 50 companies announcing results. First quarter earnings, as represented by the S&P 500 companies, are anticipated to grow a paltry 1.1% yr/yr. This is down significantly from the expectation of 6.5% growth at the start of the quarter and versus growth of 9.9% in 4Q 2013. Investors will be watching to see if the anemic earnings growth was mostly due to the impact of harsh winter weather and what kinds of outlooks are presented by company management teams. Interestingly, revenue is expected to grow by 2.7% yr/yr–growing faster than earnings. For some time now, earnings have grown at a higher rate than revenue, thanks to internal efficiencies and cost reduction efforts. Has that benefit run its course? The recent market turbulence has come in part due to increasing concern about whether companies’ growth prospects are high enough to support the rise in valuations that have occurred over the past year (particularly for richly valued stocks). Erosions in revenue and/or earnings trends or tepid outlooks could certainly challenge investor confidence and willingness to put more money to work in the market.

Current Week Month of April YTD
Dow Jones (INDU) -2.31% -2.55% -2.70%
S&P 500 (SPX) -2.60% -2.95% -1.19%
Nasdaq (CCMP) -3.09% -4.72% -3.92%
MSCI EAFE (EAFE) -0.58% 0.31% 1.15%
Russell Mid Cap (RMC) -3.36% -3.85% -0.46%
Russell 2000 (RTY) -3.62% -5.23% -4.16%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
Bed, Bath & Beyond (BBBY) Reported FY 4Q earnings of $1.60/share–in line with expectations Unchanged
Chevron (CVX) Lowered its earnings outlook for 1Q 14 earnings to $2.57/share versus the consensus estimate of $2.77 Unchanged
Costco Corp (COST) March same store sales growth of 5% was higher than the 3.5% consensus estimate Unchanged
JPMorgan Chase (JPM) 1Q 14 earnings of $1.28/share came in below the $1.40 consensus estimate Unchanged

Fixed Income Update

Geo-political concerns over the ongoing crisis in Ukraine continued to garner fixed income investors attention this week. With pro-Russian groups holding buildings in western Ukraine while others loyal to Moscow continue to protest in the east, tensions remain extremely high in the region. Russian President Vladimir Putin, in response to sanctions imposed by the U.S. and Europe, exerted his stronghold over Russia’s natural gas pipelines by continuing negotiations with China on a 30 year contract now that their European market access is threatened. Where, how and when this ends is anybody’s guess, but heading into the weekend investors have elected to reduce risk by moving into U.S. Treasuries.

Wednesday’s release of the minutes from the March 18-19 Federal Open Market Committee meeting was highly anticipated as investors sought clarity on the Fed’s forward guidance. The markets keyed in on the statement, in the minutes, that: (emphasis added) “A number of participants noted the overall upward shift since December in participants’ projections of the federal funds rate included in the March Summary of Economic Projections (SEP), with some expressing concern that this component of the SEP could be misconstrued as indicating a move by the Committee to a less accommodative reaction function.” In other words, the committee thinks it is a mistake for the markets to believe that the change in the Fed Funds component of SEP means that the Fed has changed how they are approaching a decision on when to raise the Fed Funds rate. Rather, the committee is still approaching monetary policy the same way they were prior to the meeting (i.e. driven by economic data). The more dovish tone from the minutes was in stark contrast to the perceived hawkish comments from Fed Chair Janet Yellen following the March meeting when she suggested the central bank may raise its benchmark rate in the middle of 2015. The market currently puts the likelihood the Fed will start raising rates in July 2015 at 61 percent. The chances for a rate increase in June 2015 fell to 40 percent, compared with 54 percent on April 4th.

As investors continue to sort through the mixed messages received from Yellen and the Fed there was a strong flight-to-safety trade this week due to geopolitical unrest, with Treasury yields down between 6 & 13 basis points.

Company Spotlight

JPMORGAN CHASE & CO (JPM)
A3/A/A+
Reported quarterly earnings Buy / Buy
WELLS FARGO & CO (WFC)
A2/A+/AA
Reported quarterly earnings Buy / Buy

April 11, 2014

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.01 0.01 0.00 0.01 0.00
Taxable MMF 0.01 0.01 0.00 0.02 -0.01
2-Year Treasury 0.35 0.41 -0.06 0.23 0.12
5-Year Treasury 1.57 1.70 -0.13 0.73 0.84
10-Year Treasury 2.61 2.72 -0.11 1.79 0.82
30-Year Treasury 3.47 3.58 -0.11 3.00 0.48
5-Year Exp. Inflation 1.82 1.84 -0.02 2.20 -0.38
2-Year Agency 0.46 0.41 0.05 0.30 0.16
5-Year Agency 1.69 1.79 -0.10 0.90 0.79
10-Year Agency 3.09 3.28 -0.19 2.22 0.87
2-Year Corporate* 0.74 0.77 -0.03 0.66 0.08
5-Year Corporate* 2.23 2.33 -0.10 1.60 0.63
10-Year Corporate* 3.66 3.76 -0.10 2.99 0.67
30-Year Corporate* 4.46 4.55 -0.09 4.23 0.23
2-Year Municipal** 0.44 0.46 -0.02 0.42 0.02
5-Year Municipal** 1.39 1.43 -0.04 0.99 0.40
10-Year Municipal** 2.89 2.94 -0.05 2.22 0.67
30-Year Municipal** 4.87 4.92 -0.05 4.00 0.87
Fed Funds 0.25 0.25 0.00 0.25 0.00
Prime Rate 3.25 3.25 0.00 3.25 0.00
Dollar*** $79.49 $80.42 -$0.94 $82.25 -$2.76
CRB $309.39 $304.84 $4.55 $289.94 $19.45
Gold $1,318.10 $1,303.20 $14.90 $1,564.30 -$246.20
Crude Oil $103.33 $101.14 $2.19 $93.51 $9.82
Unleaded Gasoline**** $3.00 $2.93 $0.07 $2.76 $0.24

Note: Agency and Municipal yields are as of the previous business day.
* Composite A
** General Obligation AA+
*** Int'l value of the U.S. dollar (Avg. exchange rate between the dollar and 6 major world currencies).
**** Futures price per gallon