Weekly Stock Market Update—January 10, 2014
By Steve Scranton, SVP, CFA
Chief Investment Officer

Stock Market Update

The first full week of 2014 got off to a lackluster start as equity investors seemed hesitant to put fresh money to work after 2013’s stellar gains and in front of some key events this week:

  • Release of minutes from the Federal Reserve’s (Fed) most recent policy meeting. Given that the Fed initiated the tapering process for its quantitative easing program at the December meeting, equity investors were eager for additional insight into the Fed’s decision. Overall, the minutes revealed little that was not already factored into market expectations.
  • Federal Reserve Chairman confirmation. The Senate easily approved Janet Yellen as the next chairman of the Fed–and the first woman to head the central bank. She is widely seen as continuing the policies set in place by Ben Bernanke. The transition from Bernanke to Yellen will occur at the end of January.
  • December non-farm payrolls data. The Bureau of Labor Statistics reported that in December 74,000 jobs were added, which was sharply lower than the consensus expectation for an addition of 197,000. The news will likely cause speculation about how this could affect the Fed’s future decisions regarding tapering its economic stimulus activities.
  • The start of fourth quarter earnings season. Equity investors are eagerly awaiting news on how corporate America’s business activities fared in the fourth quarter’s economic environment. Current expectations are for earnings, as represented by the S&P 500 companies, to rise by 7.6% year over year, while forecasts call for revenue to grow by a paltry 0.4%. With little help expected to come from topline growth, it appears that corporate America will still be working to deliver bottom line growth from internal efforts. Of note, the expectation for earnings growth has been revised down meaningfully from an early October forecast for 11% growth. Thus, corporate America once again has a much lower hurdle to clear in meeting expectations. Earnings season will ramp up meaningfully next week.

The new year has started with a sense of managed optimism. Although constructive sentiment has carried over from last year, investors will be looking for positive economic data and a careful tapering of the Fed’s quantitative easing program. Over the next few weeks, however, earnings season is likely to take center stage.

Current Week Month of January YTD
Dow Jones (INDU) -0.15% -0.77% -0.77%
S&P 500 (SPX) 0.63% -0.27% -0.27%
Nasdaq (CCMP) 1.06% -0.01% -0.01%
MSCI EAFE (EAFE) -0.31% -1.19% -1.19%
Russell Mid Cap (RMC) 1.27% 0.43% 0.43%
Rusell 2000 (RTY) 0.74% 0.09% 0.09%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
VERIZON COMMUNICATIONS (VZ) Announced a deal to sell all of its 700A spectrum licenses to T-MobileUS for $3.3 billion plus AWS spectrum. Unchanged
MEDTRONIC INC (MDT) MDT reported that it had acquired TYRX, Inc., a developer of implantable combination antibiotic drug and medical devices, for $160 million. Unchanged
MICROSOFT CORP (MSFT) Announced an agressnent to acquire Parature, a provider of cloud based customer service software. Terms of the agreement were not disclosed. Unchanged
JPMORGAN CHASE & CO (JPM) JPM announced its plans to sell or exit its prepaid card business, which includes prepaid cards for corporate payrolls and its public prepaid card business. Unchanged
HESS CORP (HES) Hess announced it had filed a registration statement with the SEC to spinoff its retail division. Additionally, the company will solicit offers to purchase the entire retail business from potential buyers. Unchanged
BED BATH & BEYOND INC (BBBY) Reported FY 3Q 2014 operating earnings of $1.12/share, an increase of ~8.7% over last year, but $0.03 below analysts’ estimates. Management reduced its full year 2014 EPS guidance to $4.79-$4.86/share, down from previous estimates of $4.88-$5.01/share, and below consensus estimates of $5.00. Unchanged
COSTCO WHOLESALE CORP (COST) Costco reported December comparable sales growth of 3%, above the consensus estimate of 1.8%. Excluding the negative impacts from gasoline deflation and foreign exchange, comparable sales rose 5%, with U.S. sales increasing 5%, and international sales up 7%. Net sales for the month increased 6.1% to $11.53 billion. Unchanged

Fixed Income Update

Picking up where last year ended, fixed income investors continued to worry about improving economic data and a Fed becoming more concerned about the benefits of quantitative easing. As the minutes of the Federal Reserve’s December meeting were released, investors gained more insight into the Fed’s growing belief that asset purchases could be on a steady path lower, possibly by $10 billion per meeting.

The week ended with negative economic news and declining yields. The weak jobs report was the dominant factor causing yields to decline from 3 to 14 basis points on the week.

Reviewing the performance of the Fixed Income markets for 2013, markets ended with the same trends we have seen for most of the year. As the year progressed, the Federal Reserves’ asset purchase program (QE) dominated market sentiment. With the short end of the maturity market locked at very low rates, the intermediate and long end saw the brunt of the damage and accounts for much of the negative returns in the Fixed Income space. The Fed’s QE had another outcome on the markets in general. QE forced investors to seek yield by increasing the amount of credit risk in their portfolios.

Interest rate risk came to the forefront in 2013. The most exposed securities to this risk are bonds with long maturities. Treasury securities with maturities longer than 25 years lost 3.29% while Treasury securities with maturities 1–3 years showed a positive return of 0.06% in the 4th quarter. Treasury Inflation Protection Securities (TIPS) under-performed once again due to the declining inflation trend. Similar to nominal Treasuries, the longer maturities suffered the most. TIPS maturing 0 – 5 years returned -0.18% while TIPS maturing 10+ years had a -4.00% 4th quarter return.

Fannie Mae and Freddie Mac continued to shrink the amount of debt they have outstanding. As investors hunt for yield, Agency performance showed good returns relative to Treasuries. For the year, Agencies across the maturity spectrum returned a negative 1.38% versus Treasuries at negative 2.75%.

Investors’ quest for yield by taking greater credit risk is most evident in the corporate bond sector. Corporate bonds returned negative 2.01% in 2013 compared to Treasuries at negative 2.75%.

In spite of continued huge mutual fund redemptions, Municipal bonds did surprisingly well. The outflows were met with a decreased supply and attractive yields to entice crossover investors. Led by the 4–6 year sector, Municipal bonds returned 0.32% for the quarter.

Barclays Capital Indices Total Return Analysis
December 31, 2013

Taxable Bonds (Blended Benchmark) 0.28%
Short-term Government/Corporate 0.25%
U.S. Government/Credit 1-5 Index 0.28%
U.S. Treasury* -2.75%
U.S. TIPS* -8.61%
U.S. Agency* -1.38%
GNMA Index* -2.12%
U.S. Credit** -2.01%
Municipal Bond (Blended Benchmark) 1.09%
Municipal Bond 1 Year (1-2)*** 0.80%
Municipal Bond 3 Year (2-4)*** 1.33%
T-Bill 0.05%

* Returns are for entire maturity spectrum
** Returns are for entire maturity spectrum and all investment grade credit ratings
*** The index has four main sectors: general obligation bonds, revenue bonds, insured bonds, and prerefunded bonds

Company Spotlight

Aa3/AA+/#N/A N/A
Sold $3 billion of 2 & 5 year fixed and floating rate debt. Buy / Buy
Sold $650 million of 3 year floating rate debt. Buy / Buy

January 10, 2014

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.01 0.01 0.00 0.06 -0.05
Taxable MMF 0.01 0.01 0.00 0.08 -0.07
2-Year Treasury 0.37 0.40 -0.03 0.25 0.12
5-Year Treasury 1.63 1.73 -0.11 0.79 0.83
10-Year Treasury 2.86 3.00 -0.14 1.90 0.96
30-Year Treasury 3.80 3.93 -0.13 3.08 0.72
5-Year Exp. Inflation 1.91 1.87 0.03 2.16 -0.26
2-Year Agency 0.53 0.48 0.05 0.30 0.24
5-Year Agency 2.04 2.02 0.02 1.00 1.04
10-Year Agency 3.63 3.66 -0.03 2.34 1.28
2-Year Corporate* 0.84 0.80 0.05 0.65 0.19
5-Year Corporate* 2.50 2.49 0.01 1.67 0.83
10-Year Corporate* 4.13 4.17 -0.04 3.07 1.06
30-Year Corporate* 4.88 4.93 -0.05 4.30 0.58
2-Year Municipal** 0.48 0.48 0.00 0.49 -0.01
5-Year Municipal** 1.49 1.49 0.00 1.08 0.41
10-Year Municipal** 2.95 2.93 0.02 2.15 0.80
30-Year Municipal** 5.04 5.02 0.02 3.97 1.07
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*** $80.64 $80.79 -$0.15 $79.74 $0.91
CRB $275.42 $276.53 -$1.11 $296.53 -$21.11
Gold $1,244.90 $1,238.60 $6.30 $1,678.00 -$433.10
Crude Oil $92.74 $93.96 -$1.22 $93.82 -$1.08
Unleaded Gasoline**** $2.68 $2.65 $0.03 $2.57 $0.11

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