Weekly Stock Market Update—April 12, 2013
By Steve Scranton, SVP, CFA
Chief Investment Officer

Stock Market Update

Lingering concern regarding the prior week’s disappointing employment data got the stock market off to a slow start at the beginning of the week. However, investors seemed to quickly put those worries on the back burner as they looked for news to bolster the positive sentiment which the market has maintained so far this year. Investors looked hopefully to the official kick-off of first quarter earnings season when Alcoa (AA) reported its results after the market closed on Monday. Unfortunately, they did not receive the positive boost that they were looking for, as Alcoa reported an all-too-familiar pattern of beating earnings estimates but falling short of revenue growth expectations. The aid to sentiment, instead, came from overseas news. On Tuesday and Wednesday, China released a pair of economic data which investors viewed favorably. China reported that its inflation slowed more than expected and that imports were stronger than expected in March. This fueled hopefulness that China’s economy, one of the key drivers of global economic activity, might be strengthening. Investors seemed to put aside the reality that a significant portion of China’s economic activity is being propped up by government spending and that one month of opaque news from China (which many question as to the accuracy of the data) does not necessarily signal a more enduring trend.

A mid-week release of the Federal Reserve’s (Fed) minutes from its most recent policy meeting also gave investors comfort. The Federal Open Market Committee (FOMC) noted that quantitative easing activities could be slowed later this year if the labor market continues to improve. Last week’s disappointing employment data did not demonstrate an improvement, which led equity investors to conclude that the quantitative easing program, which has benefitted the stock market, will continue for the foreseeable future.

For the week, the major indices climbed every day but Friday. Friday’s modest retreat was driven by weaker than expected retail sales data for March, as well as disappointing reports from two banks: JPMorgan Chase (JPM) and Wells Fargo (WFC). These two companies reported earnings which beat estimates, but revenues that fell short of expectations. Nevertheless, it was another good week for the stock market, with the Dow rising by 2.1% and the S&P 500 gaining 2.3%.

Next week, earnings season will kick into high gear as 74 of the S&P 500 companies report first quarter results. Earnings for the S&P 500 companies are expected to grow at a modest 1.1% year/year in the first quarter. This forecast has been scaled back significantly over the past 6 months: in October, 7.1% growth was forecast and by January that estimate was revised down to 4.3%. Revenue is expected to also grow at an anemic 1.0% for the first quarter. Investors have been rattled by disappointing economic and employment data lately and so are looking for good news from corporate America, not only on the most recent quarter but also in terms of management’s expectations for business activity in 2013.

Current Week Month of April YTD
Dow Jones (INDU) 2.11% 2.05% 14.23%
S&P 500 (SPX) 2.34% 1.34% 12.08%
Nasdaq (CCMP) 2.85% 0.88% 9.46%
MSCI EAFE (EAFE) 3.37% 2.58% 8.00%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
BED BATH & BEYOND INC (BBBY) BBBY reported fiscal fourth quarter earnings of $1.68 per share, growing +13.51% year-over-year and in-line with the consensus estimate. Revenue increased 24.5%, slightly above analysts' expecations. Unchanged
COSTCO WHOLESALE CORP (COST) March same store sales growth of 4% was below the consensus estimate of 5.2%, and compared to March 2012 same store sales growth of 6%. Changes in both gasoline prices year-over-year and foreign exchange had a negative impact on results. Unchanged
HESS CORP (HES) The company announced it has entered into an agreement with OAO Lukoil to sell its Russian subsidiary Samara-Nafta for approximately $2.05 billion. Unchanged
JPMORGAN CHASE & CO (JPM) JPM reported earnings of $1.59 per share for the first quarter of 2013, better than the Street estimate of $1.39, and up from $1.19 reported for the same year ago period. The company intends to increase the second quarter dividend to $0.38 per share from $0.30, and authorized an additional $6 billion share repurchase program, to commence during the second quarter 2013. Unchanged
INVESCO LTD (IVZ) Invesco announced that it is selling Atlantic Trust Private Wealth Management to CIBC for $212 million. The deal is expected to close in the second half of 2013, and the company intends to use the proceeds from the sale to repurchase shares. Unchanged

Fixed Income Update

After last week’s dismal employment numbers spurred a Friday rally, we saw Treasuries sell off across the curve Monday, Tuesday and Wednesday (i.e. yields rose), level on Thursday and rally (i.e. yields declined) by week end.

U.S. economic data was tepid, at best, and did not provide much color to the unfolding impact of sequestration; the effects of which remain to be seen.

Market participants seem to be digesting the onslaught of data, not the least of which is Japan’s extremely aggressive stimulus plan announced last week. US Treasury prices moderated some by Friday; we saw yields increase 1 to 4 basis points on the week.

Auctions this week included $32 billion of a 3 year note, $21 billion of a 10 year note and $13 billion of a 30 year bond. Demand was soft on the 3 year, firmed up for the 10 year and waned a bit on the 30 year.

FOMC meeting minutes were released early on Wednesday after they were inadvertently sent to some individuals Tuesday afternoon. The central bank said the individuals that received the minutes early were primarily congressional employees and employees of trade organizations. Other than that snafu, the minutes were little changed from the prior month, and continued to highlight the on-going discussion between the benefits and potential costs of quantitative easing (QE). Participants generally indicated they viewed the economic data received during the inter-meeting period as somewhat more positive than expected, but that fiscal policy appeared to become more restrictive which left the outlook for the economy little changed since the January meeting. Also noted was the need to use a range of indicators to gauge labor market conditions.

Company Spotlight

JPMORGAN CHASE & CO (JPM)
A2/A/A+
Reported quarterly earnings. Buy / Buy
WELLS FARGO & CO (WFC)
A2/A+/AA-
Reported quarterly earnings. Buy / Buy

April 12, 2013

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.10 0.10 0.00 0.28 -0.18
Taxable MMF 0.06 0.06 0.00 0.24 -0.18
2-Year Treasury 0.23 0.23 0.00 0.29 -0.06
5-Year Treasury 0.69 0.69 0.00 0.89 -0.20
10-Year Treasury 1.72 1.71 0.01 2.05 -0.33
30-Year Treasury 2.92 2.88 0.04 3.21 -0.29
5-Year Exp. Inflation 2.16 2.25 -0.09 1.97 0.19
2-Year Agency 0.30 0.29 0.00 0.39 -0.09
5-Year Agency 0.86 0.86 0.00 1.17 -0.31
10-Year Agency 2.15 2.14 0.01 2.68 -0.53
2-Year Corporate* 0.63 0.67 -0.04 1.28 -0.65
5-Year Corporate* 1.53 1.58 -0.05 2.39 -0.86
10-Year Corporate* 2.90 2.93 -0.03 3.81 -0.91
30-Year Corporate* 4.13 4.13 0.00 4.86 -0.73
2-Year Municipal** 0.43 0.41 0.02 0.49 -0.06
5-Year Municipal** 1.00 1.02 -0.02 1.18 -0.18
10-Year Municipal** 2.22 2.27 -0.05 2.38 -0.27
30-Year Municipal** 4.00 4.01 -0.01 4.27 -0.27
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*** $82.13 $82.50 -$0.37 $79.29 $2.84
CRB $287.21 $288.28 -$1.07 $305.61 -$18.40
Gold $1,501.40 $1,575.90 -$74.50 $1,680.60 -$179.20
Crude Oil $91.29 $92.70 -$1.41 $103.64 -$12.35
Unleaded Gasoline**** $2.80 $3.86 -$0.06 $3.00 -$0.20

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