Weekly Stock Market Update—March 15, 2013
By Steve Scranton, SVP, CFA
Chief Investment Officer

Week in Review

The equity markets continued to grind higher, which was surprising given the lack of meaningfully significant or new information to support the upward momentum. Although moves were muted early in the week, solid gains on Thursday resulted in full-week gains of 0.9% for the Dow Jones Industrial Average (Dow) and 0.7% for the S&P 500. It was hard to find an impetus responsible for the gains. The most noteworthy data included:

  • Retail sales for February rose by 1.1%, better than the expected gain of 0.5% and higher than last month’s gain of 0.2%. There had been concern that higher social security taxes would negatively impact consumer behavior so this better than expected report helped diminish those fears.
  • The producer price index (PPI) for February was in line with expectations at 0.7%. Core PPI (ex-food and energy) was also in line with expectations at 0.2%.
  • Initial jobless claims declined by 10,000 last week–to 332,000, below the expected level of 350,000 along with the prior reading of 342,000.

A lack of compelling new information this week left investors with little to bolster their enthusiasm. But that didn’t seem to matter. Since the beginning of the year, equities have continued to move higher without a major consolidation event. The Dow and S&P 500 now stand with year-to-date gains of 11.4% and 9.9%, respectively. Over time, there are periods when the market can get ahead of itself. There are rising expectations that a downward event could be looming: either a digestion (down 1-5%), a pullback (down 5-10%), or a correction (down 10-20%). However, stocks continue to rise, while the volatility Index (VIX, also known as the fear index) continues to work its way lower. Nothing seems to be getting in the way of this relentless march higher. The reality is that this market is being driven by the Federal Reserve’s actions rather than the economy or corporate fundamentals; so trying to predict price behavior based on historical patterns is difficult at best. This week, the Dow continued to hit all-time intraday highs, while the S&P 500 remains within reach of its all-time closing high of 1,565.15, set on October 9, 2007 (Friday’s closing level for the S&P 500 was 1,560.70). We continue to believe that the market may be vulnerable to a digestion, pullback or correction event, given that so much of this year’s gains have come so quickly.

Current Week Month of Feb. YTD
Dow Jones (INDU) 0.87% 3.38% 11.42%
S&P 500 (SPX) 0.66% 3.14% 9.95%
Nasdaq (CCMP) 0.16% 2.86% 7.85%
MSCI EAFE (EAFE) 1.01% 2.09% 6.53%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
COSTCO WHOLESALE CORP (COST) Announced second quarter 2013 operating earnings of $1.10 per share which topped the consensus estimate of $1.06 and compared to earnings of $0.90/share for 2Q 2012. Unchanged
PHILIP MORRIS INTERNATIONAL (PM) Philip Morris International Inc announced that André Calantzopoulos was appointed CEO, to become effective May 2013. Louis Camilleri, PMI's current Chairman and CEO, will remain as Chairman of the Board and as an employee of the Company. Unchanged

Fixed Income Update

High yield bonds have been getting a lot of attention as of late. After seeing net mutual fund outflows throughout February, March has seen a net inflow of $402 million. Mutual funds generally represent retail and retail only makes up 25% of the holder base in high yield with institutional at 75%. So using the retail flow as an indicator could be flawed.

What is concerning some investors is the relative richness of the asset class as it maintains levels that are outright at historical low yields. But this may be more a function of the overall level of interest rates as measured by U.S. Treasury yields than the asset class being expensive versus Treasuries.

It is true that the quality of high yield bonds may be getting weaker as bondholder protections placed in the covenants weaken. But the fundamental backdrop remains well supported by earnings and capital market conditions that are robust as ever. The combined leveraged credit new issue volume already stands at $245 billion year to date. Last year this number was $660 billion for the full year. Default rates are currently only tracking 1.2%, or less than a third their 3.9% 25 year average and high yield bond spreads compare very closely to their 25 year average. So despite historically high prices, on a relative basis, high yield still represents value.

This week, Treasury yields have been stuck in a tight range with low trading volume. Overall, U.S. Treasury yields ranged from unchanged to decreasing 5 basis points.

Company Spotlight

COSTCO WHOLESALE CORP (COST)
A1/A+/A+
Reported quarterly earnings. Buy / Buy

March 8, 2013

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.09 0.09 0.00 0.23 -0.14
Taxable MMF 0.06 0.06 0.00 0.25 -0.19
2-Year Treasury 0.25 0.25 0.00 0.36 -0.11
5-Year Treasury 0.83 0.89 -0.05 1.09 -0.26
10-Year Treasury 1.99 2.04 -0.05 2.28 -0.29
30-Year Treasury 3.21 3.25 -0.03 3.42 -0.20
5-Year Exp. Inflation 2.41 2.37 0.04 2.17 0.24
2-Year Agency 0.32 0.29 0.03 0.47 -0.15
5-Year Agency 1.04 1.03 0.01 1.37 -0.33
10-Year Agency 2.44 2.44 0.00 2.93 -0.49
2-Year Corporate* 0.67 0.65 0.02 1.27 -0.60
5-Year Corporate* 1.74 1.74 0.00 2.48 -0.74
10-Year Corporate* 3.20 3.21 -0.01 3.93 -0.73
30-Year Corporate* 4.45 4.44 0.01 4.96 -0.51
2-Year Municipal** 0.42 0.45 -0.03 0.47 -0.05
5-Year Municipal** 1.07 1.01 0.06 1.08 -0.01
10-Year Municipal** 2.33 2.26 0.07 2.47 -0.14
30-Year Municipal** 4.03 3.99 0.04 4.29 -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*** $82.24 $82.70 -$0.46 $80.15 $2.09
CRB $296.44 $294.38 $2.06 $315.90 -$19.46
Gold $1,590.30 $1,576.90 $13.40 $1,659.50 -$69.20
Crude Oil $93.50 $91.95 $1.55 $105.11 -$11.61
Unleaded Gasoline**** $3.16 $3.20 -$0.05 $3.01 $0.15

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