Weekly Stock Market Update—February 14, 2013
By Steve Scranton, SVP, CFA
Chief Investment Officer

Weekly Stock Market Update

It was a good week for stocks, with market behavior favorably influenced by commentary from the Federal Reserve (Fed). Newly appointed Fed Chairman Janet Yellen made her Congressional debut when she testified before the House Financial Services Committee on Tuesday. Her testimony, which demonstrated continuity at the helm of the central bank, included commentary that recent volatility in the global financial markets does “not pose a substantial risk to the U.S. economic outlook.” Yellen confirmed that the Fed plans to continue winding down its quantitative easing program throughout the year, even though the economic and labor market recoveries are far from complete. She also reiterated that the tapering timeline is not on a pre-set course, but that it would take “a notable change in the outlook” to modify the current plan. Her remarks dispelled a recent rise in concern about the domestic economy. The equities market interpreted her comments as reassurance that the Fed views recent weather disruptions on the east coast and emerging market issues as transitory and that the economy is on a sustainable growth path. Stocks posted their best gains of the week on Tuesday, in reaction to this news.

Better than expected Chinese trade data also helped sentiment, easing recently elevated concern about China’s economy—and the possible negative implications for global economic growth. The Chinese government reported that its trade growth accelerated in January, with the value of imports rising 10%, while exports increased by 10.6%—both coming in better than expected. The data drew some skepticism because of its discrepancy versus other trade data in the region. Nevertheless, the news still allayed fear that the Chinese economy could be undergoing a sharper than expected slowdown.

Stocks posted their best weekly performance of the year thus far, with the Dow Jones Industrial Average (Dow) and the S&P 500 both rising by a robust 2.4%, in spite of lingering global economic uncertainties. After Fed Chairman Yellen’s comments, investors this week seemed willing to overlook some soft domestic economic data, attributing the anomaly to bad weather on the eastern seaboard, as opposed to a slowing economy. But an important question continues to linger, as it has for some time now: Is the economy strong enough to stand on its own as the Fed withdraws its stimulative support?

Current Week Month of Feb. YTD
Dow Jones (INDU) 2.45% 3.16% -2.19%
S&P 500 (SPX) 2.39% 3.31% -0.26%
Nasdaq (CCMP) 2.89% 3.52% 1.78%
MSCI EAFE (EAFE) 2.10% 2.88% -1.23%
Russell Mid Cap (RMC) 2.51% 3.23% 1.22%
Russell 2000 (RTY) 2.96% 1.67% -1.14%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
PIONEER NATURAL RESOURCES CO.(PXD) PXD announced 4Q operating earnings of $1.00 per share, $0.01 above the consensus estimate, and compared to earnings of $0.83/share a year ago. Revenue beat expectations, growing 19% y/y to $971 million. Unchanged
PROCTER & GAMBLE CO/THE (PG) PG lowered its FY 2014 sales and earnings guidance to reflect unfavorable foreign exchange rates in Venezuela, and the devaluation of several currencies in various developing markets. Management now expects core EPS growth of 3%-5%, down from earlier guidance of 5%- 7%, and sales growth of 0%-2%, vs. prior estimates of 1%-2%. Unchanged
CISCO SYSTEMS INC (CSCO) CSCO reported fiscal 2Q14 operating earnings of $0.47 per share, on sales of $11.2 billion, topping the Street's estimate of $0.46/share, on revenues of $11.0 billion. Unchanged
APPLIED MATERIALS, INC (AMAT) AMAT reported fiscal first quarter earnings of $0.23 per share, above analysts' forecast of $0.22/share. Revenue for the quarter increased 39% to $2.2 billion, modestly exceeding consensus estimates of $2.1 billion. Unchanged

Fixed Income Update

Federal Reserve (Fed) Chairwoman Janet Yellen delivered her first semiannual Monetary Policy Report to the House Financial Services committee on Tuesday. There were no surprises in her comments as she has been very involved as Vice Chair of the Fed in the construction of the current policy.

Some of the more important aspects of her comments were that the economy is improving, but not fast enough and the Fed will continue to taper at a measured pace unless it decides not to. To help quell investors’ fears that tapering = tightening, she said that after QE, policy will remain highly accommodative. Since the Fed has stated that it wants the unemployment rate lower and inflation higher as conditions to tighten, she tried to address fears that the Fed would tighten due to the recently lower unemployment rate. She stated that, despite the progress in economic growth, the policy makers are dissatisfied with the “large fraction of unemployed” people who have been out of work for more than six months and the elevated number of those working part-time because full-time work is unavailable. In effect, she is changing the unemployment threshold to include people who are not counted as unemployed due to working part-time.

Her comments on inflation were very benign. With core inflation at 1.0%, well below the 2.0% target, there is no current need to change this goalpost. So the FOMC position on policy is that they remain data dependent and rates will remain low.

Market action was a little volatile. As economic data came in on the weaker than expected side, investors aggressively bid on this weeks’ $70 billion auctions of 3-year, 10-year, and 30- year securities. Real money accounts (versus high frequency trading or speculative accounts) were active, leaving dealers with lower allocations. Still this news did not overcome investors’ expectations that tapering of asset purchases is expected to continue. For the week, yields ranged between increasing 1 basis point to increasing 6 basis points.

The municipal market yield curve continues to feel the effect of investors’ desire to decrease interest rate risk. Municipal mutual fund investors who were spooked by the problems in Detroit and Puerto Rico have decided to cut this exposure by selling their longer duration funds that hold these credits and concentrate their purchases in the shorter end. We have seen the short end of the municipal yield curve trade extremely well with the 2018–2019 sectors leading the way. Where this sector had traded at 100%+ of Treasury yields over the last few years, it is not uncommon to see these maturities at 70% to 75% of Treasuries. (See chart below) We are only purchasing these maturities on a case by case basis when we see value.

Maturity AAA Municipal U.S. Treasuries Muni % of Treasuries
1 year 0.17 0.11 154.5%
5 years 1.1 1.5 73.30%
10 years 2.52 2.73 92.30%
20 years 3.54 3.45 102.60%
30 years 3.87 3.68 105.20%

Company Spotlight

BANK OF AMERICA CORP (BAC)
Baa2/A-/A
Sold $1.75 billion of 3 year fixed and floating rate notes. Hold / Hold
CISCO SYSTEMS INC (CSCO)
A1/AA-/#N/A N/A
Reported quarterly earnings Buy / Buy
JPMORGAN CHASE & CO (JPM)
A3/A/A+
Sold $4.25 billion of 3 year fixed and floating rate notes. Buy / Buy
PEPSICO INC (PEP)
A1/A/A
Reported quarterly earnings Buy / Buy
OCCIDENTAL PETROLEUM CORP (OXY)
A1/A/A
Announced the separation of its California business to be completed in late 2014 or early 2015, creating two independent, publicly traded companies. Buy / Buy

February 14, 2014

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.01 0.01 0.00 0.11 -0.10
Taxable MMF 0.01 0.01 0.00 0.07 -0.06
2-Year Treasury 0.31 0.31 0.01 0.26 0.05
5-Year Treasury 1.52 1.47 0.05 0.85 0.67
10-Year Treasury 2.74 2.68 0.06 2.00 0.74
30-Year Treasury 3.69 3.67 0.02 3.18 0.52
5-Year Exp. Inflation 1.92 1.93 -0.01 2.33 -0.41
2-Year Agency 0.40 0.38 0.02 0.29 0.11
5-Year Agency 1.78 1.74 0.05 1.01 0.77
10-Year Agency 3.36 3.33 0.03 2.39 0.97
2-Year Corporate* 0.74 0.75 -0.01 0.65 0.08
5-Year Corporate* 2.24 2.24 0.00 1.71 0.53
10-Year Corporate* 3.84 3.86 -0.02 3.14 0.70
30-Year Corporate* 4.71 4.73 -0.02 4.36 0.34
2-Year Municipal** 0.44 0.45 -0.01 0.44 0.00
5-Year Municipal** 1.43 1.44 -0.01 1.05 0.38
10-Year Municipal** 2.97 2.95 0.02 2.20 0.77
30-Year Municipal** 5.05 5.01 0.04 3.97 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*** $80.13 $80.69 -$0.56 $80.46 -$0.33
CRB $293.24 $289.77 $3.47 $299.67 -$6.43
Gold $1,318.90 $1,262.90 $56.00 $1,635.50 -$316.60
Crude Oil $100.29 $99.88 $0.41 $97.31 $2.98
Unleaded Gasoline**** $2.80 $2.75 $0.05 $2.76 $0.04

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