Weekly Stock Market Update—February 21, 2013
By Steve Scranton, SVP, CFA
Chief Investment Officer

Weekly Stock Market Update

After last week’s impressive rally, the major equity indices were down modestly for the overall holiday-shortened week, as investors paused to ponder mixed news and data. There was a string of economic data releases but the most anticipated news came on Wednesday. Minutes from the Federal Reserve’s (Fed) late-January policy meeting showed several committee members remain steadfast in the commitment to steadily reducing the pace of bond purchases associated with its quantitative easing program, while retaining the flexibility to adjust the pace of purchases if economic activity deviates substantially from expectations. The minutes also noted that “a few participants” thought “it would soon be appropriate” to alter guidance on its short term rate and that an increase in short term rates could come “relatively” soon. The committee discussed possible changes to forward guidance but could not agree on what changes would be most appropriate. Regarding recent emerging market volatility, the committee stated that the effects were not significant enough to generate spillover effects on the U.S. Even though the minutes provided little new information, the equity markets seemed to key in on the comments about possible rate increases. The Dow Jones Industrial Average (Dow) and the S&P 500 each declined by 0.6% after release of the minutes–their worst day of the week.

The best day of the week for stocks was Thursday, with the Dow and S&P 500 both rising by 0.6%. Equity investors reacted positively to the release of the Markit Purchasing Managers Index (PMI) for February, which came in at 56.7, higher than the expectation of 53.6 and last month’s reading of 53.7. This survey showed U.S. manufacturing activity rising at its fastest pace in almost four years. The report helped offset a weak survey on Chinese manufacturing.

This week, equities took a breather after two consecutive weeks of gains. Investors continued to shrug off weaker than expected economic data, ascribing the downturn to impacts coming from recent brutal winter storms across much of the U.S., rather than deteriorating fundamentals. Uncertainty about the economy seems to have a “pass” for now but consistent, better economic data will ultimately be needed to reassure investors that this soft patch is transitory.

Current Week Month of Feb. YTD
Dow Jones (INDU) -0.27% 2.88% -2.46%
S&P 500 (SPX) -0.08% 3.23% -0.34%
Nasdaq (CCMP) 0.50% 4.04% 2.28%
MSCI EAFE (EAFE) 0.72% 4.01% -0.14%
Russell Mid Cap (RMC) 1.14% 4.41% 2.38%
Russell 2000 (RTY) 1.35% 3.05% 0.19%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
MEDTRONIC INC (MDT) Medtronic reported fiscal 3Q earnings of $0.91 per share, and consolidated revenue of $4.2 billion (up 3.4% year/year), matching the Street estimate. Unchanged
EXPRESS SCRIPTS HOLDING CO (ESRX) ESRX announced fourth quarter earnings of $1.12 per share, in line with consensus estimates. Revenue declined 5.8% to $25.8 billion, yet topped expectations of $25.4 billion. Management expects FY 2014 adjusted earnings of $4.88-$5.00 per share, vs. current analysts' estimates of $4.93. Unchanged
VERIZON COMMUNICATIONS (VZ) On February 21, 2014, Verizon completed its acquisition of Vodafone's 45% stake in Verizon Wireless. Unchanged
EASTMAN CHEMICAL CO. (EMN) EMN has approved the repurchase of up to an additional $1 billion of Eastman common stock. The board also raised the quarterly cash dividend to $0.35 per share, from $0.33/share, for a yield of ~1.66%. Unchanged

Fixed Income Update

The Federal Open Market Committee (FOMC) released the minutes of their last meeting (January 28-29th) on Wednesday. This was the last meeting led by former Chairman Ben Bernanke. The best way to describe the tone would be restrained optimism.

Investors were bought Treasuries leading into the meeting based on the weaker economic data we have seen so far in the first quarter. Hence, the relatively optimistic minutes caught investors off. This created the impetus for Treasuries to sell off some once the minutes were released.

Fed officials looked past poor weather and emerging market turmoil to expect the economy to continue to expand at a moderate pace. They supported continued measured reductions in their asset purchases. They also acknowledged that forward guidance would need to be revised soon, but disagreed on the form. Recently, the Fed has listed explicit guidance in the form of a 6.5% unemployment rate and a 2% inflation rate as triggers to change their current monetary policy. As we approach the 6.5% unemployment rate the Fed is realizing that the economy is still not where they would like it to be. Going forward, expect more of a qualitative guidance policy with a larger range of variables affecting policy makers’ decisions.

Fed officials expressed greater concern about persistently low inflation than in past minutes thus the reason to soften the 6.5% unemployment threshold. Markets appeared to take note that a few participants (not necessarily voters) suggested rate hikes possibly could be appropriate relatively soon. This is not news, however, since two Fed officials indicated in the December projections that rate hikes should start in 2014. Moreover, other participants pushed back by saying standard policy rules did not apply in the current environment.

The economic data over the last week continues to disappoint. Combined with geopolitical turmoil in Ukraine and Venezuela, one would think price action would be stronger. From a technical perspective, a market that doesn’t trade well on weak data and cannot sustain higher price levels is at risk. This will bear continued monitoring to see if long-term rates begin rising again or just become more volatile within a range.

For the week, yields ranged from unchanged to decreasing 1 basis point.

Company Spotlight

GOOGLE INC-CL A (GOOG)
Aa2/AA/#N/A N/A
Sold $1.0 billion of debt maturing in 10 years. Buy / Buy
WAL-MART STORES INC (WMT)
Aa2/AA/AA
Reported quarterly earnings Buy / Buy

February 21, 2014

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.01 0.01 0.00 0.12 -0.11
Taxable MMF 0.01 0.01 0.00 0.07 -0.06
2-Year Treasury 0.31 0.31 0.00 0.25 0.06
5-Year Treasury 1.53 1.53 0.01 0.84 0.69
10-Year Treasury 2.73 2.74 -0.01 1.98 0.75
30-Year Treasury 3.69 3.70 -0.01 3.17 0.52
5-Year Exp. Inflation 1.90 1.92 -0.02 2.30 -0.40
2-Year Agency 0.41 0.40 0.00 0.30 0.10
5-Year Agency 1.81 1.80 0.01 1.00 0.81
10-Year Agency 3.37 3.37 0.00 2.38 1.00
2-Year Corporate* 0.74 0.75 0.00 0.67 0.08
5-Year Corporate* 2.27 2.26 0.01 1.72 0.55
10-Year Corporate* 3.86 3.86 0.00 3.14 0.72
30-Year Corporate* 4.73 4.72 0.01 4.37 0.36
2-Year Municipal** 0.43 0.44 -0.01 0.44 -0.01
5-Year Municipal** 1.41 1.43 -0.02 1.07 0.34
10-Year Municipal** 2.96 2.97 -0.01 2.26 0.70
30-Year Municipal** 5.04 5.05 -0.01 3.99 1.05
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*** $80.24 $80.14 $0.10 $81.46 -$1.22
CRB $301.58 $293.24 $8.34 $293.13 $8.45
Gold $1,324.50 $1,318.60 $5.90 $1,578.60 -$254.10
Crude Oil $102.16 $100.30 $1.86 $92.84 $9.32
Unleaded Gasoline**** $2.83 $2.81 $0.02 $2.66 $0.17

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