Weekly Stock Market Update—March 8, 2013
By Steve Scranton, SVP, CFA
Chief Investment Officer

Week in Review

Stocks continued their upward march this week, closing in positive territory for five straight days. For the week, the Dow Jones Industrial Average (Dow) and the S&P 500 both rose by 2.2%. Much of this gain came early in the week, some of which was influenced by:

  • Comments by Federal Reserve (Fed) Vice Chairman Yellen. She highlighted points suggesting an improved outlook for the labor market and, overall, her remarks were supportive of continued accommodative actions by the Fed to support the economy–in line with Chairman Bernanke’s comments last week. With the important non-farm payrolls report due for release at the end of the week, equity investors became hopeful that the report might be better than expected, while also being soothed by the idea that the Fed’s efforts to support the economy are not at issue right now.
  • A pledge from China that it would meet expected economic growth targets. Premier Wen Jiabao commented that the government would take steps to support an economic growth target of 7.5%—but that he believes China’s leaders are aiming for something higher than that target. The prospect of China’s economic growth rate has been on investors’ minds for some time now.
  • The ADP employment report showed that private employers added a larger than expected 198,000 workers to payrolls in February (versus the expected 170,000 increase) but lower than the 215,000 workers added in January. The equity markets drew hope from this data that the important monthly jobs data on Friday might be better than expected.

The market’s upward momentum slowed later in the week. On Thursday, initial jobless claims were reported at 340,000 for last week–down 7,000 from the prior week and lower than the expected level of 355,000. But this information was not robust enough to influence the markets meaningfully higher. Friday brought much anticipated news on the employment front. The Bureau of Labor Statistics (BLS) reported that during February non-farm payrolls rose by 236,000 jobs. This was much better than the expected increase of 165,000 jobs. In addition, the unemployment rate declined to 7.7% from 7.9% in January. However, on a disappointing note, much of the decrease in the unemployment rate occurred as those searching for work gave up and dropped out of the labor force. The overall details of the jobs report demonstrated that some progress is being made but that there still remain areas of concern and much progress still needs to be made. Nevertheless, the response by the equities market was modestly positive.

The stock market has worked its way relentlessly higher so far this year. There was much fanfare in the media this week about how the Dow broke through its previous all-time high level and the S&P 500 was near its all-time high. Many are questioning whether the market can keep climbing from here. While no one can foresee the future, in the past stocks have often drifted lower in the months after breaking through previous record highs. Given the S&P 500’s strong gain of 16.0% in 2012, followed by its 9.2% increase in the first 2+ months of 2013, it would not be surprising to see the market go through a breather or pullback of some sort. Worries remain regarding how Washington will handle the path of fiscal policy, how budget cuts might impact the U.S. economy, and Europe’s continuing struggles with its debt issues. Over the long term, stocks achieve attractive gains, but the path is rarely smooth.

Current Week Month of Feb. YTD
Dow Jones (INDU) 2.23% 2.49% 10.45%
S&P 500 (SPX) 2.22% 2.46% 9.23%
Nasdaq (CCMP) 2.38% 2.69% 7.68%
MSCI EAFE (EAFE) 1.84% 1.02% 5.42%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
HESS CORP (HES) Announced it would divest its retail, energy marketing, and energy trading business by 2015, to focus on exploration and production. HESS will use proceeds from the asset sales to pay down short-term debt. Additionally, the company will increase the annual dividend to $1.00/share, up from $0.40, and repurchase up to $4 billion of its stock, commencing in the third quarter 2013. Further, the company plans to nominate six new independent board members, at the annual shareholders meeting in May. Unchanged
QUALCOMM INC (QCOM) QCOM announced a new $5.0 billion stock repurchase program and increased its quarterly cash dividend from $0.25 per share to $0.35, for a yield of approximately 2.1%. Unchanged
APPLIED MATERIALS, INC (AMAT) AMAT increased the quarterly dividend to $0.10 from $0.09 per share, bringing the yield to ~ 2.9%. Unchanged
COSTCO WHOLESALE CORP (COST) Costco reported February same store sales growth of 6%, above the consensus estimate of 5.6%. Unchanged

Fixed Income Update

Last week U.S. Treasury yields seemed to be breaking through the tight range that they had been stuck in for the last two months to the low end. Some encouraging words from European Central Bank President Mario Draghi stating that economic activity in Europe should gradually recover in 2013 and that inflation risks are broadly balanced calmed the growing fears emanating from the Italian political turmoil and reversed the premium associated with safe haven assets.

The events in Europe don’t seem to be getting enough of the credit in the media. In addition to Mario Draghi’s comments, S&P raised Portugal’s outlook to Stable from Negative, driving down Portuguese yields to lows not seen since December 2010. When looking at the 30 major bond markets (see graph below) around the world for the last week, it is clear to see a calm has come over investors and has encouraged them away from the perception of safety.

The week ended with signs of domestic strength. The U.S. employment report showed an increase of 236,000 versus expectations of 165,000 with the unemployment rate at 7.7% versus 7.9% last month. Although the headline jobs data were a welcome development, the entirety of the report does not rise to the substantial improvement criteria from the Fed’s perspective and should not alter the current QE3 program any time soon. For the week, U.S. Treasury yields increased by 2 to 21 basis points.

March 8, 2013

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.09 0.11 -0.02 0.22 -0.13
Taxable MMF 0.07 0.07 0.00 0.23 -0.16
2-Year Treasury 0.25 0.24 0.02 0.31 -0.05
5-Year Treasury 0.89 0.74 0.15 0.88 0.01
10-Year Treasury 2.06 1.84 0.21 2.01 0.04
30-Year Treasury 3.25 3.05 0.20 3.18 0.08
5-Year Exp. Inflation 2.37 2.30 0.07 2.08 0.29
2-Year Agency 0.29 0.28 0.01 0.41 -0.12
5-Year Agency 1.00 0.89 0.11 1.16 -0.16
10-Year Agency 2.39 2.24 0.15 2.67 -0.28
2-Year Corporate* 0.66 0.65 0.01 1.25 0.59
5-Year Corporate* 1.72 1.61 0.11 2.31 -0.59
10-Year Corporate* 3.18 3.02 0.16 3.71 -0.53
30-Year Corporate* 4.42 4.27 0.15 4.77 0.35
2-Year Municipal** 0.44 0.43 0.01 0.44 0.00
5-Year Municipal** 1.01 1.00 0.01 1.00 0.01
10-Year Municipal** 2.24 2.19 0.05 2.36 -0.12
30-Year Municipal** 3.97 3.95 0.02 2.36 -0.26
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*** $82.75 $82.31 $0.44 $79.14 $3.61
CRB $294.38 $290.36 $4.02 $316.04 -$21.66
Gold $1,577.30 $1,572.30 $5.00 $1,698.70 -$121.40
Crude Oil $91.80 $90.68 $1.12 $106.58 -$14.78
Unleaded Gasoline**** $3.20 $3.13 $0.07 $3.05 $0.16

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