Weekly Stock Market Update—February 22, 2013
By Steve Scranton, SVP, CFA
Chief Investment Officer

Week in Review

Investor anxiety rose this week–and drove a resultant increase in equity market volatility. Nevertheless, while day to day market action was choppy, for the overall holiday-shortened week stocks moved very little: the Dow Jones Industrial Average (Dow) gained 0.2%, while the S&P 500 lost 0.2%. Catalysts which primarily exerted pressure on psychology included:

  • Release of minutes from the Federal Reserve’s (Fed) late January policy meeting. The minutes noted that members were divided over the risks and benefits of continuing quantitative easing to help the economy. Many officials voiced concern regarding the costs of more asset purchases. These comments sparked concern that the central bank could slow or stop buying bonds sooner than the equities market has expected. As we have commented in the past, the equities market detests uncertainty. Equity investors have drawn comfort from the hope that the Fed’s stimulative measures would help support the struggling economy. Thus, news that this psychological positive could be taken away sooner than expected raises the level of uncertainty–and fear of the unknown. The equities market showed its displeasure over this event– during the 2-day period of Wednesday and Thursday (Fed minutes were released Wednesday), the Dow and S&P 500 declined by 1.1% and 1.8%, respectively.
  • Disappointing U.S. economic data.1) January housing starts came in much lower than expected–dropping by 8.5% after increasing by an upwardly revised 15.7% in December; 2) the producer price index (PPI) for January increased by 0.2%. While coming in around expectations, prices increased from the -0.3% reading in December; 3) initial jobless claims rose by a greater than expected 20,000 last week–to 362,000; 4) 4th quarter 2012 mortgage delinquencies rose by 7.1% while 4th quarter mortgage foreclosures also increased by 3.7%; and 5) the Philadelphia Fed’s index of economic activity fell by a much greater than expected 12.5 in February.

On Friday the markets reversed to the upside. The Dow and the S&P 500 both rose by 0.9% in reaction to fresh comments from a Fed member. St. Louis Fed president James Bullard noted in an interview that “Fed policy will remain easy for a long time” and that “we are looking for improvements in the labor markets.” This allayed equity investors’ fears that the central bank might cease its stimulus measures in the near future.

Volatility began to meaningfully invade the equity markets this week, driven by increased concern about the future of the Fed’s stimulus program and the health of the economy. The markets will soon face another test with the upcoming debate in Washington over automatic spending cuts set to commence on March 1st–and which could exert pressure on an already anemic economy. Congress returns from vacation next week so it is likely that the debate on this topic will heat up.

Current Week Month of Feb. YTD
Dow Jones (INDU) 0.19% 1.33% 7.31%
S&P 500 (SPX) -0.22% 1.37% 6.62%
Nasdaq (CCMP) -0.90% 0.78% 4.90%
MSCI EAFE (EAFE) -0.70% -2.03% 3.16%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
HJ HEINZ CO (HNZ) Shares of H.J. Heinz (HNZ) have been placed on hold. Separately, HNZ reported operating earnings for the third quarter of $0.99 per share, better than the Street expectation of $0.90. Seeking Replacement
EXPRESS SCRIPTS HOLDING CO (ESRX) ESRX reported fourth quarter operating earnings of $1.05 per share, above analysts' forecast of $1.04. In conjunction with the earnings release the company gave an outlook for strong 2013 growth, sees 12% - 15% earnings growth in 2013, with full year earnings to range from $4.20 - $4.30 per share, which compares to current consensus estimates of $4.23. Unchanged
MEDTRONIC INC (MDT) MDT reported fiscal third quarter operating earnings of $0.93 per share, above the Street expectation of $0.91. Unchanged

Fixed Income Update

This was a short week for the bond market and the biggest market mover was the release of the FOMC January 29-30 meeting minutes on Wednesday. The minutes showed an ongoing policy debate as to the length, pace and impact of Quantitative Easing (QE). Although worries raised and outlined in the FOMC minutes about the costs of QE and complications inherent in an exit strategy are not without warrant, it remains the general consensus of Fed policymakers, and more importantly the majority consensus, that the benefits of QE at this time outweigh the potential costs.

Yields initially climbed higher as market participants interpreted the cost/benefit discussion in the minutes as indicative of a potential reduction in bond purchases. Weaker than anticipated economic news combined with stable inflation news caused cooler heads to prevail as the week rolled on. 10 year U.S. Treasury (UST) yields dropped from a high on Wednesday of 2.05% to 1.97% on Friday—still well within the 30 day range.

Core inflation measures out this week included the Producer Price Index (PPI) and the Consumer Price Index (CPI). Both showed slight gains but were below forecast and consensus estimates, affirming the idea that inflation remains muted and not an immediate concern for most policymakers. Additionally, weakness in the job market as indicated by U.S. Jobless Claims rising by 20,000 and uninspiring data out of Europe supports continued accommodative monetary policy.

On the supply front, the Treasury auctioned $9 billion of 30 year Treasury Inflation- Protected Securities (TIPS) and the demand was weaker than expected. Next week the Treasury will auction $35 billion in 2 and 5 year notes as well as $29 billion in 7 year debt.

For the week, yields declined 2 to 4 basis points.

Company Spotlight

MORGAN STANLEY (MS)
Baa1/A-/A
Sold $3.75 billion in 3 and 10 year debt. Hold / Hold
WAL-MART STORES INC (WMT)
Aa2/AA/AA
Reported quarterly earnings. Buy / Buy

February 22, 2013

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.12 0.11 0.01 0.31 -0.19
Taxable MMF 0.07 0.07 0.00 0.21 -0.14
2-Year Treasury 0.25 0.27 -0.02 0.30 -0.05
5-Year Treasury 0.83 0.86 -0.03 0.89 -0.06
10-Year Treasury 1.97 2.00 -0.04 2.00 -0.03
30-Year Treasury 3.16 3.18 -0.02 3.14 0.02
5-Year Exp. Inflation 2.32 2.32 0.00 2.11 0.21
2-Year Agency 0.30 0.30 0.00 0.41 -0.11
5-Year Agency 1.00 1.00 0.00 2.11 0.21
10-Year Agency 2.38 2.37 0.00 2.69 -0.32
2-Year Corporate* 0.67 0.67 0.00 1.33 -0.67
5-Year Corporate* 1.72 1.73 -0.01 2.40 -0.68
10-Year Corporate* 3.14 3.16 -0.01 3.79 -0.65
30-Year Corporate* 4.37 4.38 -0.01 4.82 -0.45
2-Year Municipal** 0.44 0.44 0.00 0.47 -0.03
5-Year Municipal** 1.07 1.05 0.02 0.95 0.12
10-Year Municipal** 2.26 2.22 0.04 2.24 0.02
30-Year Municipal** 3.99 3.97 0.02 4.20 -0.21
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*** $81.44 $80.58 $0.86 $78.82 $2.62
CRB $293.52 $298.45 -$4.93 $323.40 -$29.88
Gold $1,579.50 $1,609.50 -$30.00 $1,786.30 -$206.80
Crude Oil $93.37 $95.86 -$2.49 $107.83 -$14.46
Unleaded Gasoline**** $3.09 $3.13 -$0.04 $2.86 $0.23

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