Weekly Stock Market Update—January 17, 2014
By Steve Scranton, SVP, CFA
Chief Investment Officer

Stock Market Update

Fourth quarter earnings season dominated most of equity investor attention this week. At the beginning of the week, uncertainty about upcoming earnings news pressured stocks lower. However, the market rallied nicely on Tuesday and Wednesday in reaction to some better than expected earnings news (particularly in the financial services sector) that eased uncertainty and bolstered confidence. In particular, Bank of America (BAC) and JPMorgan Chase (JPM) reported meaningful reductions in loan loss provisions and declines in foreclosures. Technology stocks also provided market leadership during the two-day rally.

The market reversed course and moved moderately lower later in the week after disappointing results from some other financial services companies. Notably, Goldman Sachs (GS) and Citigroup (C) missed versus expectations, due in part to lower bond trading and advisory activity. This thwarted the positive reaction to earnings earlier in the week and re-ignited the tone of uncertainty.

Also in focus this week was an active calendar of economic news. In general, the data was better than expected early on, but weaker than expected later in the week. Finally, the Federal Reserve’s (Fed) January Beige Book on business activity was released Wednesday. The report contained a somewhat more positive assessment of economic activity than the December release, along with comments that most districts reported stronger retail activity and had optimistic outlooks for manufacturing. The description of construction and real estate activity was also upbeat.

Overall, the week’s mixed bag of earnings and economic news left market sentiment confused and uncertain. Next week, earnings season will shift into high gear, as more than 60 of the S&P 500 companies release results. Investors will be looking for clues as to how businesses fared in the last three months of 2013. Given the tremendous gains achieved last year, the market could be vulnerable to a pullback on big disappointments.

Current Week Month of January YTD
Dow Jones (INDU) 0.15% -0.62% -0.62%
S&P 500 (SPX) -0.18% -0.45% -0.45%
Nasdaq (CCMP) 0.55% 0.54% 0.54%
MSCI EAFE (EAFE) 0.34% 0.08% 0.08%
Russell Mid Cap (RMC) -0.22% 0.20% 0.20%
Rusell 2000 (RTY) 0.35% 0.44% 0.44%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
JPMORGAN CHASE & CO (JPM) Reported 4Q 2013 earnings of $1.40 per share, above consensus estimates of $1.35, compared to earnings of $1.35/share for the same period a year ago. Revenue of $24.1 billion exceeded analysts estimates of $23.7 billion. Unchanged
CSX CORP (CSX) CSX reported fourth quarter earnings of $0.42 per share, $0.01 below analysts’ expectations. Revenue increased 5.1% to $3.03 billion, modestly above estimates of $3.01 billion. 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
PNC FINANCIAL SERVICES GROUP (PNC) PNC announced 4Q 13 earnings of $1.85 per share, above the consensus estimate of $1.65/share, vs. $1.71 a year ago. Unchanged
GOLDMAN SACHS GROUP INC (GS) Fourth quarter earnings of $4.60/share beat the Street estimate by $0.39, vs. earnings of $5.60 per share last year. Revenue declined 4.9% to $8.8 billion. Unchanged
UNITEDHEALTH GROUP INC (UNH) UNH announced fourth quarter earnings of $1.41/share, up from $1.20 last year, and above the consensus estimate of $1.40. Revenue increased 8.2% to $31.1 billion. Additionally, management reaffirmed its FY 2014 EPS guidance of $5.40-$5.60 per share, on revenue of $128 - $129 billion, vs. current consensus estimates of $5.60/share, and revenue of $131 billion. Unchanged
COMERICA INC (CMA) CMA reported 4Q 2013 earnings of $0.77 per share, up from $0.68/share last year, and exceeded analysts' estimates of $0.74/share. Unchanged

Fixed Income Update

After last week’s move lower in interest rates due to a “weaker than expected” employment report, yields moved sideways as economic reports did little to give further direction.

In general, domestic and international economic reports this week have led to only modest gains in bond prices as they have basically met expectations. This is in contrast to the last four weeks where the norm was beating expectations. For yields to move lower, the economic data will soon have to fall short of expectations. For the week, yields ranged from unchanged to down 5 basis points.

Municipal bond yields have steadily moved lower over the last month and continue to outperform as an asset class. This is in contrast to mutual fund flows which have been negative since last May. In 2013, municipal bond funds saw outflows of over $50 billion. One would think this would cause municipal bonds to underperform. This has not been the case. Along with lower municipal issuance, cross-over buyers (taxable investors) have found the asset class very attractive. What has not been discussed much is that municipal bond mutual fund investors have been selling their holdings of funds to buy the asset class directly through individual bond purchases. This allows them to better control their interest rate risk in an environment where long-term yields have increased 100 basis points last year. Additionally, it has allowed them to lessen their exposure to Detroit and Puerto Rico thus lowering credit risk. The negative fund flows seem to be abating. The past week has now seen mutual funds that invest in municipal bonds showing their first inflows since last May.

For fixed income investors, the Federal Reserve has temporarily moved to the sidelines. Chairman Bernanke’s term will expire at the end of January and new Chairman Yellen will assume leadership of the Fed. It is not unusual for Federal Reserve Board members and Federal Reserve Bank presidents to be relatively quiet as the transition to new leadership occurs. The next Federal Reserve meeting will be on January 29th, so focus will probably shift back to the Federal Reserve as the meeting draws closer.

Company Spotlight

JPMORGAN CHASE & CO (JPM)
A3/A/A+
Reported quarterly earnings Buy / Buy
WELLS FARGO & CO (WFC)
A2/A+/AA
Reported quarterly earnings. Also sold $1.5 billion of 7 year debt. Buy / Buy
BANK OF AMERICA CORP (BAC)
Baa2/A-/A
Reported quarterly earnings Hold / Hold
INTEL CORP (INTC)
A1/A+/A+
Reported quarterly earnings Buy / Buy
AMERICAN EXPRESS CO (AXP)
A3/BBB+/A+
Reported quarterly earnings Hold / Hold
GOLDMAN SACHS GROUP INC (GS)
Baa1/A-/A
Reported quarterly earnings Hold / Hold
MORGAN STANLEY (MS)
Baa2/A-/A
Reported quarterly earnings Hold / Hold
GENERAL ELECTRIC CO (GE)
Aa3/AA+/#N/A N/A
Reported quarterly earnings Buy / Buy

January 17, 2014

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.01 0.01 0.00 0.05 -0.04
Taxable MMF 0.01 0.01 0.00 0.08 -0.07
2-Year Treasury 0.37 0.37 0.00 0.26 0.11
5-Year Treasury 1.62 1.62 0.00 0.79 0.83
10-Year Treasury 2.82 2.86 -0.04 1.88 0.94
30-Year Treasury 3.75 3.80 -0.05 3.07 0.68
5-Year Exp. Inflation 1.88 1.90 -0.02 2.18 -0.30
2-Year Agency 0.47 0.46 0.02 0.31 0.16
5-Year Agency 1.92 1.91 0.01 1.03 0.89
10-Year Agency 3.49 3.51 -0.02 2.33 1.17
2-Year Corporate* 0.79 0.77 0.02 0.68 0.10
5-Year Corporate* 2.38 2.36 0.01 1.69 0.69
10-Year Corporate* 3.98 4.01 -0.03 3.07 0.91
30-Year Corporate* 4.77 4.79 -0.03 4.31 0.46
2-Year Municipal** 0.48 0.48 0.00 0.44 0.04
5-Year Municipal** 1.49 1.49 0.00 1.00 0.49
10-Year Municipal** 2.95 2.95 0.00 2.08 0.87
30-Year Municipal** 5.04 5.04 0.00 3.92 1.12
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*** $81.24 $80.66 $0.58 $79.65 $1.59
CRB $278.41 $275.42 $2.99 $300.33 -$21.92
Gold $1,253.00 $1,246.90 $6.10 $1,690.80 -$437.80
Crude Oil $92.09 $92.72 $1.37 $95.49 -$1.40
Unleaded Gasoline**** $2.62 $2.67 -$0.05 $2.58 $0.05

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