Weekly Stock Market Update—January 24, 2014
By Steve Scranton, SVP, CFA
Chief Investment Officer

Stock Market Update

Intra-day market action was choppy during the latest holiday-shortened week, as earnings season shifted into high gear. With a light calendar of scheduled economic data releases, corporate America had little competition for investor attention early in the week. Seventy S&P 500 companies reported their quarterly results during the overall week so there was much information for investors to analyze.

Overall, earnings season is delivering a mixed bag of news thus far, with takeaways that have failed to inspire enthusiasm. From an earnings perspective, companies are once again demonstrating the ability to beat estimates; however, revenue growth remains anemic and has been more likely to disappoint relative to expectations. As in past quarters, expectations have been easier to beat since estimates have been lowered over the past three months. In addition, company management teams’ earnings guidance and outlooks for the year have not been very inspiring. About eight companies have issued negative outlooks for each one that has been positive. In general, there has not been enough “good” earnings news to push the market higher but not enough “bad” news to drive investors out of the market.

However, on Thursday and Friday a past concern resurfaced, fueling a sharp two-day sell-off of over 3% for both the Dow Jones Industrial Average and the S&P 500. The emerging market economies pushed their way back into the limelight. Weaker than expected manufacturing activity in China during January suggested a slowdown in its economy. This news reignited concern about the global economy–a fear that has been at bay for a while now.

Fear and uncertainty returned swiftly to the market this week. The pendulum of investor sentiment appears poised to swing from positive to negative, as China’s latest data has called into question global economic growth. In the meantime, corporate earnings results have not been inspiring. These observations come as the Federal Reserve (Fed) prepares for its first policy meeting of 2014 next week– and provides an update on tapering plans for its quantitative easing program. If companies deliver a stream of favorable earnings news and the Fed provides a comforting update next week, this latest sell-off could be reversed. The pace of earnings reports will remain high next week, with 126 of the S&P 500 companies announcing their results.

Current Week Month of January YTD
Dow Jones (INDU) -3.50% -4.10% -4.10%
S&P 500 (SPX) -2.62% -3.06% -3.06%
Nasdaq (CCMP) -1.65% -1.12% -1.12%
MSCI EAFE (EAFE) -1.99% -1.73% -1.73%
Russell Mid Cap (RMC) -2.49% -2.29% -2.29%
Rusell 2000 (RTY) -2.07% -1.64% -1.64%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
VERIZON COMMUNICATIONS (VZ) Verizon reported fourth quarter operating earnings of $0.66 per share, up 47% year/year, and above the Streets estimate of $0.65/share. Revenues increased 3.4% to $31.1 billion, slightly above analysts' expectations. Unchanged
JACOBS ENGINEERING GROUP INC (JEC) JEC posted fiscal 4Q earnings of $0.71 per share, $0.02 below consensus estimates. Revenue met Wall Streets' expectation, increasing 11.2% to $3.1 billion. Unchanged
STARBUCKS CORP (SBUX) Starbucks reported fiscal 1Q14 earnings of $0.71 per share, above analysts' estimates of $0.69/share, and $0.57 a year earlier. Consolidated revenues rose 12% y/y to $4.2 billion, slightly below forecasts of $4.3 billion. Unchanged
MICROSOFT CORP (MSFT) Fiscal second quarter earnings rose 2.6% to $0.78 per share, compared with $0.76/share in the year ago quarter, easily beating Wall Street's estimate of $0.68/share. Sales increased 14.3% to $24.5 billion, also above expectations of $23.7 billion. Unchanged
W.W. GRAINGER (GWW) GWW reported 4Q earnings of $2.59 per share, $0.03 below the consensus estimate. Revenue rose 6.8% y/y to $2.4 billion, in-line estimates. In conjunction with the earnings release, management lowered its FY14 earnings and sales guidance, largely due to a weaker Canadian dollar and the divestiture of a number of direct marketing specialty brands that were sold in December. Unchanged

Fixed Income Update

Fears emanating from the emerging market economies took center stage this week as a flight to safety took hold on Thursday and Friday.

The catalyst for the weakness in the emerging market economies was a weak Chinese manufacturing report. As many emerging economies depend on commodity sales, a slowdown in China portends weaker demand. But a China slowdown is not the whole story.

The bigger concern in the emerging market economies came from an abrupt change in tone among the largest central banks with respect to liquidity. The fear is that the U.S. Federal Reserve (FED), Bank of England (BoE), and even the Bank of Japan (BoJ) will become less accommodative faster than had been thought of even from a few weeks ago. Emerging markets were hurt last spring when talk of a Fed taper first began and it looks like we are seeing signs of it again. For the week, yields in the U.S. declined 3 to down 11 basis points.

For the first time since the launch of Treasury Inflation Protected Securities (TIPS) in 1997, the U.S. Treasury is launching a new product. Floating Rate Notes (FRN) are securities whose rate of interest “floats” off of an index or a security. The security being sold will have a 2 year final maturity. Future issues could have maturities ranging from 1 to 10 years based on the needs of the U.S. Treasury. The $15 billion being sold next week will have a yield that is determined by a spread over the 3 month Treasury bill that is auctioned each week. As a result, the interest rate on this security will be re-set each week until it matures in 2 years. New FRN’s will be sold every quarter followed by additional issuance of an existing maturity (i.e. a re-opening) the following two months. The expectation is that demand will be strong as government money market funds and central banks are seen as potential big buyers. FRN’s are considered a very defensive investment as they are a hedge against rising interest rates.

Company Spotlight

Reported quarterly earnings Buy / Buy
Reported quarterly earnings Buy / Buy
Sold $5.25 billion of debt including 5 year fixed & floating rate, 10 year & 30 year issues. Also sold $300 million of perpetual preferred stock. Buy / Buy
Reported quarterly earnings Buy / Buy
Reported quarterly earnings Buy / Buy
Sold $2.75 billlion of 5 year fixed & floating rate debt. Hold / Hold
Aa3/AA-/#N/A N/A
Reported quarterly earnings Buy / Buy
Reported quarterly earnings Hold / Hold
Reported quarterly earnings Buy / Buy

January 24, 2014

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.01 0.01 0.00 0.07 -0.06
Taxable MMF 0.01 0.01 0.00 0.08 -0.07
2-Year Treasury 0.34 0.37 -0.03 0.24 0.10
5-Year Treasury 1.55 1.63 -0.07 0.77 0.79
10-Year Treasury 2.73 2.82 -0.09 1.85 0.87
30-Year Treasury 3.64 3.75 -0.11 3.04 0.60
5-Year Exp. Inflation 1.86 1.88 -0.02 2.20 -0.34
2-Year Agency 0.44 0.46 -0.01 0.28 0.16
5-Year Agency 1.88 1.90 -0.02 1.01 0.87
10-Year Agency 3.42 3.47 -0.04 2.30 1.13
2-Year Corporate* 0.78 0.78 -0.01 0.64 0.13
5-Year Corporate* 2.34 2.36 -0.03 1.65 0.69
10-Year Corporate* 3.91 3.96 -0.04 3.03 0.89
30-Year Corporate* 4.68 4.75 -0.07 4.26 0.42
2-Year Municipal** 0.48 0.48 0.00 0.45 0.03
5-Year Municipal** 1.49 1.49 0.00 0.99 0.50
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*** $80.46 $81.23 -$0.77 $79.95 $0.51
CRB $282.54 $278.41 $4.13 $300.42 -$17.88
Gold $1,268.00 $1,251.90 $16.10 $1,699.90 -$401.90
Crude Oil $96.93 $94.37 $2.56 $95.95 $0.98
Unleaded Gasoline**** $2.67 $2.62 $0.05 $2.61 $0.06

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