Weekly Stock Market Update—January 31, 2014
By Steve Scranton, SVP, CFA
Chief Investment Officer

Stock Market Update

Uncertainty continued to permeate the equities market, causing a week of turbulence and volatility. Investors’ concerns over the emerging markets remained high, while they also faced a big week of corporate earnings releases and awaited news from the latest Federal Reserve (Fed) policy setting meeting:

  • Emerging markets. Investors were caught off guard last week by a disappointing manufacturing report out of China, which initiated a sharp and sudden sell off in stocks. Fear of slowing economic growth in China— and its possible impact on the global economy—continued to weigh on sentiment this week. In addition, concern is high that monetary policy actions by central banks will not be enough to prevent a massive withdrawal of investment in the emerging economies.
  • Earnings season. This was the busiest week, with 126 companies reporting results. Approximately ½ of the S&P 500 companies have now reported fourth quarter earnings. The flow of results was decidedly mixed this week. Although a number of companies announced better than expected results, several prominent companies missed relative to expectations. High operating margins remain a theme; however, approximately 75% of the companies that have reported thus far have provided earnings outlooks that are below current expectations.
  • Federal Open Market Committee (FOMC) meeting. On Wednesday, the Fed demonstrated its commitment to slowly and consistently tapering its quantitative easing program. The Fed announced an additional $10 billion per month reduction in the pace of bond purchases (to a further reduced rate of $65 billion per month) starting in February. Although many had expected the $10 billion per month reduction, hope had risen over the past week that it might delay the tapering timeline given the recent concerning news and events in the emerging markets. Stocks sold off precipitously following this announcement.

The first month of 2014 delivered disappointing performance, with the Dow Jones Industrial Average losing 5.2% and the S&P 500 declining by 3.5%–their worst monthly declines since May 2012. While 2013 was characterized by a much higher tolerance for risk taking in the investment community, recent events have clearly prompted a pull-back in that appetite for risk. Until uncertainty is put to rest, expect volatility to remain in place.

Current Week Month of January YTD
Dow Jones (INDU) -1.14% -5.19% -5.19%
S&P 500 (SPX) -0.41% -3.46% -3.46%
Nasdaq (CCMP) -0.57% -1.68% -1.68%
MSCI EAFE (EAFE) -2.30% -3.99% -3.99%
Russell Mid Cap (RMC) 0.35% -1.95% -1.95%
Rusell 2000 (RTY) -1.14% -2.77% -2.77%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
CATERPILLAR INC (CAT) 4Q13 EPS of $1.58/share exceeded analysts’ expectation of $1.28, and above earnings of $1.46 last year. Revenue of $14.4 billion topped estimates of $13.6 billion. Unchanged
APPLE INC (AAPL) Apple reported 1Q 2014 earnings of $14.50 per share, ahead of the Street's estimate of $14.07/share, on revenue of $57.6 billion, up 5.7% year/year, and modestly above expectations of $57.5 billion. Unchanged
NEXTERA ENERGY INC (NEE) Adjusted 4Q earnings of $0.95/share missed the consensus estimate of $0.97, and compared to earnings of $1.03 a year earlier. Revenue increased 7.6% y/y to $3.6 billion, yet missed expectations of $3.9 billion. Unchanged
VALERO ENERGY CORP (VLO)+C240 VLO reported fourth quarter earnings of $1.78 per share, above the Street's estimate of $1.66/share. Revenue of $34.4 billion was flat yearover- year, yet easily topped expectations of $30.9 billion. Unchanged
HESS CORP (HES) Hess posted 4Q operating earnings of $0.96 per share. Analysts on average had expected $1.08/share. Revenues of $3.1 billion exceeded estimates of $2.4 billion. Unchanged
PRAXAIR INC (PX) PX reported 4Q operating earnings of $1.59 per share, above the consensus estimate of $1.55. Unchanged
QUALCOMM INC (QCOM) QCOM reported fiscal 1Q revenue of $6.6 billion, up 10% from the year ago quarter. Anaysts had expected sales of $6.7 billion. Operating EPS of $1.26 per share exceeded the Street estimate of $1.18/share and compared to earnings of $1.26 last year. Unchanged
EMC CORP (EMC) EMC reported 4Q earnings of $0.60 per share, $0.01 above consensus. Revenue grew 11% y/y to $6.7 billion, vs. analysts' estimates of $6.6 billion. Unchanged
STARBUCKS CORP (SBUX) Management announced CFO Troy Alstead has been promoted to the new position of Chief Operating Officer, and Scott Maw, senior VP of Finance, will be promoted to executive VP and CFO. Unchanged
SOUTHERN CO/THE (SO) Reported 4Q 2013 operating earnings of $0.50 per share, $0.04 above analysts' estimates. Revenues increased 6.1% to $3.93 billion, above expectations of $3.87 billion. Unchanged
EASTMAN CHEMICAL CO. (EMN) EMN reported quarterly earnings of $1.35 per share, vs. consensus estimates of $1.25/share. Revenue increased 4.4% y/y to $2.3 billion, slightly above estimates of $2.2 billion. Unchanged
INVESCO LTD (IVZ) Invesco announced 4Q earnings of $0.58/share, beating expectations by a penny, and above earnings of $0.45 a year ago. Unchanged
MEAD JOHNSON NUTRITION CO (MJN) Fourth quarter earnings of $0.78 per share exceeded analysts' estimates of $0.76/share, vs. $0.72 a year ago. Revenue grew to $1.1 billion, up 8.1% y/y, in-line with expectations. Unchanged
CHEVRON CORP (CVX) CVX announced 4Q operating earnings of $2.57 per share which matched the Street estimate. Revenue fell 7% y/y to $56.2 billion. Unchanged
ABBVIE, INC (ABBV) AbbVie's fourth quarter earnings and revenue matched Wall Street's target, with EPS of $0.82/share on revenues of $5.1 billion. Unchanged

Fixed Income Update

Emerging market volatility, either caused by the U.S. Fed, slowing global economic reports, or fund flows seemed to be the main force behind this week’s movement in interest rates.

On Wednesday, the U.S. FOMC met and announced that they would taper their current asset purchase program by $10 billion bringing their monthly total to $65 billion. This was widely expected based on the economic conditions in the U.S. The Fed noted economic growth has “picked up in recent quarters.” In December, the economy was growing at “a moderate pace.” Labor market indicators “were mixed, but on balance showed further improvement.” Business fixed investment, formerly noted to be growing, now was noted to be growing “more quickly in recent months.” Forward rate guidance was unchanged. There was no mention of recent turmoil in emerging markets or equity markets. If there was any concern, we will have to wait for the minutes to read about it.

Economic growth in China appears to be slowing. The Chinese Purchasing Managers’ Index fell below 50 to 49.5 last month. An index above 50 means the number of manufacturers who said conditions improved was greater than the number saying they deteriorated. Thus a number below 50 means that more are saying conditions are getting worse. This is a concern to the emerging economies as China is buying the raw materials to produce products from these countries.

Negative fund flows are also pressuring emerging market funds. It is estimated that in the week through January 29, U.S. based emerging market equity funds saw $6.3 billion of net withdrawals. On the month, $12.2 billion has left. Emerging market bond funds reportedly experienced $2.7 billion redemptions over the course of the week and close to twice as much on the month.

As the week concludes, investors are finding comfort from the volatility in the emerging markets in the form of U.S. Treasuries. For the week, yields declined 1 to 7 basis points.

Company Spotlight

BOEING CO/THE (BA)
A2/A/A
Reported quarterly earnings Buy / Buy
COLGATE-PALMOLIVE CO (CL)
Aa3/AA-/AA
Reported quarterly earnings Buy / Buy
CONOCOPHILLIPS (COP)
A1/A/A
Reported quarterly earnings Buy / Buy
CORNING INC (GLW)
A3/A-/A
Reported quarterly earnings Buy / Buy
GOLDMAN SACHS GROUP INC (GS)
Baa1/A-/A
Sold $2.5 billiion of 5 year debt. Also issued $700 million of additional floating rate debt due in 2018. Hold / Hold
GOOGLE INC-CL A (GOOG)
Aa2/AA/#N/A N/A
Reported quarterly earnings Buy / Buy
3M CO (MMM)
Aa2/AA-/#N/A N/A
Reported quarterly earnings Buy / Buy
OCCIDENTAL PETROLEUM CORP (OXY)
A1/A/A
Reported quarterly earnings Buy / Buy
PFIZER INC (PFE)
A1/AA/A+
Reported quarterly earnings Buy / Buy
US BANCORP (USB)
A1/A+/AA-
Sold $2.75 billion of 3 year and 10 year debt. Buy / Buy

January 31, 2014

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.01 0.01 0.00 0.08 -0.07
Taxable MMF 0.01 0.01 0.00 0.07 -0.06
2-Year Treasury 0.33 0.34 -0.01 0.26 0.07
5-Year Treasury 1.50 1.54 -0.05 0.88 0.62
10-Year Treasury 2.65 2.72 -0.07 1.99 0.66
30-Year Treasury 3.60 3.63 -0.03 3.17 0.43
5-Year Exp. Inflation 1.89 1.87 0.02 2.33 -0.45
2-Year Agency 0.41 0.42 -0.01 0.31 0.10
5-Year Agency 1.80 1.81 -0.02 1.09 0.70
10-Year Agency 3.35 3.36 -0.01 2.46 0.89
2-Year Corporate* 0.78 0.77 0.01 0.67 0.11
5-Year Corporate* 2.30 2.30 0.00 1.75 0.55
10-Year Corporate* 3.88 3.88 0.00 3.18 0.70
30-Year Corporate* 4.69 4.66 0.03 4.39 0.30
2-Year Municipal** 0.48 0.48 0.00 0.48 0.00
5-Year Municipal** 1.49 1.49 0.00 1.04 0.45
10-Year Municipal** 2.95 2.95 0.00 2.16 0.79
30-Year Municipal** 5.04 5.04 0.00 3.96 1.08
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*** $81.28 $80.46 $0.82 $79.21 $2.07
CRB $283.31 $282.54 $0.77 $303.99 -$20.68
Gold $1,243.60 $1,264.30 -$20.70 $1,660.60 -$417.00
Crude Oil $97.48 $96.64 $0.84 $97.49 -$0.01
Unleaded Gasoline**** $2.63 $2.66 -$0.04 $2.68 -$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