Weekly Stock Market Update—February 07, 2013
By Steve Scranton, SVP, CFA
Chief Investment Officer

Weekly Stock Market Update

Fear and uncertainty remained decidedly in place for the equities market again this week. As fourth quarter earnings season progressed, company-specific news continued to be overshadowed by the focus on macro-economic data. The week started with another sharp sell-off. On Monday, the Dow Jones Industrial Average (Dow) and S&P 500 each fell by more than 2%–the worst one–day decline in more than seven months. Concern about economic growth prospects for China and the emerging markets remained high. But at the beginning of the week, the U.S. was added to that list of worries after the Institute for Supply Management (ISM) reported that its manufacturing index for January came in at a much weaker than expected 51.3 versus an expected reading of 56.0–and down sharply from 56.5 in December.

Market volatility moderated on Tuesday and Wednesday as investors waited with anticipation for the all-important January non-farm payrolls report due at the end of the week (and the clues it might provide on the economy). Economic data was also mixed, but seemed to temporarily mollify anxiety: 1) December factory orders, while falling by 1.5%, were better than the expected decline of 1.8%; 2) ADP reported that in January the private sector added 175,000 jobs– lower than the expected addition of 185,000, but viewed by some as steady hiring given the difficult winter weather during the month; and 3) the ISM nonmanufacturing (services) index for January rose to 54.0, modestly better than expected and higher than the level of 53.0 achieved in December.

In a surprising move, stocks moved sharply higher on Thursday with both the Dow and S&P 500 gaining 1.2%. News of a 20,000 drop in initial jobless claims last week (to 331,000 versus an expected 335,000) fueled hope that the employment report might contain positive news. On Friday, the Bureau of Labor Statistics disappointed when it reported that January non-farm payrolls rose by 113,000, below the expected 180,000 and versus 75,000 in December. Stocks moved up solidly on the news, however, suggesting that some were speculating the data might convince the Federal Reserve to slow its pace of tapering on its quantitative easing program or that the disappointing report was discounted as being affected by bad weather in January.

While starting on a rocky note, investor sentiment seemed to firm later in the week. Nevertheless, we expect investors to remain uneasy as they search for positive data to help alleviate uncertainty about the global economic backdrop.

Current Week Month of Feb. YTD
Dow Jones (INDU) 0.65% 0.65% -4.57%
S&P 500 (SPX) 0.88% 0.88% -2.61%
Nasdaq (CCMP) 0.58% 0.58% -1.11%
MSCI EAFE (EAFE) -0.29% -0.29% -4.27%
Russell Mid Cap (RMC) 0.68% 0.68% -1.28%
Russell 2000 (RTY) -1.24% -1.24% -3.98%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
MICROSOFT CORP (MSFT) On February 4, 2014, the company announced the appointment of Satya Nadella as CEO. Bill Gates will assume a new role on the Board as Founder and Technology Advisor, and current independent Board member John Thompson will assume the role of Chairman of the Board. Unchanged
PRUDENTIAL FINANCIAL INC (PRU) PRU reported fourth quarter operating earnings of $2.20 per share, missing Wall Street's estimate of $2.23, and compared to earnings of $1.69/share reported a year ago. Revenues of $11 billion were below analysts' estimates of $12 billion. Unchanged
WALT DISNEY CO/THE (DIS) DIS posted fiscal 1Q operating earning of $1.04 per share, topping the Street estimate of $0.91/share. Revenue for the quarter rose to $12.3 billion, up 8.5% year/year, and above the consensus estimate of $12.2 billion. Unchanged
PHILIP MORRIS INTERNATIONAL (PM) PM announced fourth quarter earnings of $1.37 per share which matched expectations, and compared to earnings of $1.24/share a year ago. Unchanged
COSTCO WHOLESALE CORP (COST) COST reported January total comparable sales increased 4%, above analysts' estimates of 3.5%, with U.S. sales up 5%, and International sales +1%. Excluding the negative impacts from gas price deflation and foreign exchange, January same store sales increased 6%, with U.S. sales +5%, and International +8%. Net sales for the month increased 6.4% to $7.99 billion. Unchanged

Fixed Income Update

Yields tried to drift higher this past week only to reverse course as a weaker than expected employment report renewed concerns that U.S. economic growth is tepid at best.

The volatility experienced in the emerging market economies as of late took a pause this week. If anything, it appears that a short squeeze is taking place in emerging market currencies. These currencies are generally 1%–2% higher on the week. This relative stability led rates in the U.S. to move higher thru the first four days. The recent volatility in the emerging markets led investors to add $8.31 billion to U.S. government Treasury mutual funds in the week ending February 5th verse inflows of $96.6 million week over week. This is the third consecutive week of inflows after 10 weeks of outflows.

On Friday the all-important employment report showed that payrolls gained a less than expected 113,000 versus the expected gain of 180,000. This follows a weak December employment report that showed a revised gain of just 75,000 jobs. The unemployment rate continued to decline and was reported at 6.6% versus last month’s 6.7%.

Currently the Fed is decreasing (tapering) its asset purchase program at $10 billion per meeting. At this rate they should be done by the end of this year. They have stated that they are watching the unemployment rate and inflation as measures of economic health. They would like to see the unemployment rate decrease and inflation increase. So far only the unemployment rate is moving in their desired direction while inflation is not. Even though tapering should be complete by the end of the year, low inflation could keep short-term interest rates low for a long time.

On the municipal front, Moody’s downgraded Puerto Rico general obligations two notches to Ba2 late on Friday. This follows S&P’s downgrade earlier in the week. Out of the three major rating agencies, two now assign a non-investment grade rating. This could trigger requirements to sell these bonds out of many mutual funds of which hold bonds of Puerto Rico. We will have to see how the municipal market trades next week. We do not hold any debt obligations of Puerto Rico.

For the week, yields ranged between declining 3 basis points to increasing 7 basis points.

Company Spotlight

EMERSON ELECTRIC CO (EMR)
A2/A/#N/A N/A
Reported quarterly earnings Buy / Buy
INTL BUSINESS MACHINES CORP (IBM)
Aa3/AA-/A+
Sold $1 billion of 2 year floating rate notes and $750 million of 5 year floating rate notes. Also sold $2.75 billion of 5 and 10 year notes. Buy / Buy
MERCK & CO. INC. (MRK)
A2/AA/A+
Reported quarterly earnings Buy / Buy
MICROSOFT CORP (MSFT)
Aaa/AAA/AA+
Named Satya Nadella CEO. Also announced that John Thompson would become Chairman of the Board with Bill Gates assuming the role of Founder & Technology Advisor. Buy / Buy

February 7, 2014

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.01 0.01 0.00 0.10 -0.09
Taxable MMF 0.01 0.01 0.00 0.07 -0.06
2-Year Treasury 0.30 0.33 -0.03 0.25 0.05
5-Year Treasury 1.47 1.49 -0.02 0.83 0.64
10-Year Treasury 2.68 2.65 0.03 1.96 0.72
30-Year Treasury 3.67 3.60 0.07 3.17 0.50
5-Year Exp. Inflation 1.93 1.89 0.04 2.31 -0.38
2-Year Agency 0.41 0.40 0.01 0.28 0.12
5-Year Agency 1.79 1.76 0.04 1.03 0.77
10-Year Agency 3.36 3.31 0.05 2.41 0.94
2-Year Corporate* 0.78 0.76 0.02 0.65 0.13
5-Year Corporate* 2.29 2.25 0.04 1.70 0.60
10-Year Corporate* 3.89 3.82 0.06 3.14 0.75
30-Year Corporate* 4.73 4.66 0.08 4.38 0.35
2-Year Municipal** 0.45 0.48 -0.03 0.49 -0.04
5-Year Municipal** 1.44 1.49 -0.05 1.07 0.37
10-Year Municipal** 2.95 2.95 0.00 2.22 0.73
30-Year Municipal** 5.01 5.04 -0.03 3.98 1.03
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*** $80.66 $81.31 -$0.65 $80.19 $0.47
CRB $289.77 $283.31 $6.46 $300.95 -$11.18
Gold $1,266.20 $1,240.10 $26.10 $1,671.30 -$405.10
Crude Oil $100.04 $97.49 $2.55 $95.83 $4.21
Unleaded Gasoline**** $2.75 $2.63 $0.12 $2.72 $0.03

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