Weekly Stock Market Update—April 19, 2013
By Steve Scranton, SVP, CFA
Chief Investment Officer

Stock Market Update

Disappointing news flow during the week influenced volatile stock market behavior. During the week, three days had moves in excess of 1%–two were moves to the downside, while one was a move to the upside. The news drove increased concern about the domestic and global economic landscapes. The information came primarily from these areas:

  • China. What China giveth, China taketh away. Last week, stocks were inspired by two pieces of reportedly positive data on China’s economy. However, on Monday, equity investors were sharply disappointed when China reported that its first quarter GDP grew by 7.7%–below forecasts for an 8.0% expansion. The news drove increased concern about the durability of the global economy and on Monday exerted significant pressure on stocks (Dow Jones Industrial Average–DOW–down 1.8% and S&P 500 down 2.3%). Commodities, gold, and crude oil also traded down precipitously in sympathy with the news.
  • Economic data. U.S. economic news remained mixed, but with a bias to the downside, including: 1) the April Empire manufacturing index fell much more than expected, to 3.05 from 9.24 last month; 2) the consumer price index (CPI) for March came in lower than expected, at -0.2% versus an 0.7% rise in the prior month; 3) March housing starts rose by a greater than expected 7.0%; 4) March building permits declined by a greater than expected 3.9%, reversing the gain of 3.9% experienced in February; and 5) initial jobless claims rose a slightly greater than expected 4,000 in the prior week, to 352,000. Overall, the data was more lackluster than investors had expected.
  • Earnings season. The euphoria experienced in the last earnings season (in January and February) does not appear to be carrying through in the current reporting season. Thus far, corporate earnings results for the first quarter suggest that growth has been slow and steady, rather than robust as investors had hoped. The number of positive reports has been offset by a number of disappointing reports.

Stocks have rallied for much of the year on optimism that the economic landscape is holding up reasonably well and that the Fed will keep its economic stimulus in place. This week’s confluence of disappointing data has challenged that optimism. Soft U.S. and Chinese economic data and mixed corporate earnings meaningfully undermined investor sentiment. Next week, 168 of the S&P 500 companies will report their earnings. Investors will be looking hopefully toward these companies for better news.

Current Week Month of April YTD
Dow Jones (INDU) -2.11% -0.10% 11.82%
S&P 500 (SPX) -2.11% -0.80% 9.72%
Nasdaq (CCMP) -2.70% -1.84% 6.51%
MSCI EAFE (EAFE) -2.67% -0.16% 5.11%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
COMERICA INC (CMA) Comerica reported first quarter earnings of $0.70 per share, beating analysts' estimates of $0.68. Unchanged
GOLDMAN SACHS GROUP INC (GS) Announced first quarter earnings of $4.29 per share, $0.41 better than the Street expectation, and up from earnings of $3.92 a year earlier. Unchanged
W.W. GRAINGER (GWW) Reported quarterly earnings of $2.94, beating the consensus estimate of $2.73 per share, and 14.4% higher than 1Q 2012. Additionally, GWW raised the low end of its full year 2013 revenue and earnings quidance. Unchanged
CSX CORP (CSX) First quarter operating earnings of $0.45 per share were above the Street estimate of $0.40, and revenues of $3.0 billion exceeded analysts' expecations of $2.9 billion. The company raised the quarterly cash dividend and announced a new $1 billlion share buyback program, to begin immediately. Unchanged
PNC FINANCIAL SERVICES GROUP (PNC) PNC announced 1Q 2013 earnings of $1.76, well above the consensus estimate of $1.58 per share, and up from $1.44 a year ago. Unchanged
ABBOTT LABORATORIES (ABT) Abbott reported first quarter operating earnings of $0.42 per share, above the consensus estimate of $0.41. Unchanged
INTL BUSINESS MACHINES CORP (IBM) First quarter operating earnings of $3.00 per share compared with the Street estimate of $3.05. Quarterly revenue declined 5% year-over-year to $23.4 billion, missing analysts' expecations of $24.6 billion. Unchanged
MICROSOFT CORP (MSFT) The company reported fiscal third quarter earnings of $0.72 per share, which beat Wall Street's average estimate of $0.68, and better than $0.60 per share reported a year ago. Quarterly revenue grew 17.7% year-over-year to $20.5 billion. Additionally, management noted CFO Peter Klein woudl leve the company at the end of June. Unchanged
PHILIP MORRIS INTERNATIONAL (PM) Adjusted first quarter earnings of $1.29 per share were below analysts' estimates of $1.34, yet revenue rose to $7.6 billion, up 1.8% year-over-year, and beat the consensus estimate of $7.5 billion. Unchanged
UNITEDHEALTH GROUP INC (UNH) Reported first quarter earnings of $1.16 per share, $0.02 above the consensus estimate, yet were below earnings of $1.31 reported for 1Q 2012. Revenue rose 11.2% year-overyear to $30.3 billion but missed expectations of $30.5 billion. Management warned lower government payments for private Medicare Advantage serv ices may pressure future earnings. Unchanged

Fixed Income Update

We have been noticing over the last few weeks that economic growth indicators have been tending to come in weaker than expected. Now we are seeing weakening global growth, specifically from China, capturing the markets attention. This is mainly being felt in the commodity market. The biggest losers have been metals and energy and currencies tied to major exporters of these commodities. Some notable commodity movers were gold (down 10.31%) and silver (down 16.18%) for the week.

As economic slowing in China leads to less need for commodity inputs, inflation expectations have also declined. We are seeing this translate into lower interest rates in the U.S. as inflation expectations are a major component of interest rates. This is most evident in Treasury Inflation Protected Securities (TIPS). Break even yields (expected inflation) have declined dramatically over the last month (see chart below). Amid falling inflation expectations, the U.S. Treasury sold $18 billion of 5-year inflation protected securities. As one could expect, the auction was not well received. The rate at which the securities were sold was 7 basis points cheaper than where they were trading at auction time.

Declining inflation expectations have been the main factor for Treasury yield changes this week.


Company Spotlight

Aa3/AA+/#N/A N/A
Reported quarterly earnings. Buy / Buy
Reported quarterly earnings. Hold / Hold
Reported quarterly earnings. Buy / Buy
Aa2/AA/#N/A N/A
Reported quarterly earnings. Buy / Buy
Reported quarterly earnings. Buy / Buy
Reported quarterly earnings. Buy / Buy
Reported quarterly earnings. Buy / Buy
Reported quarterly earnings. Hold / Hold
Sold $1.5B in perpetual preferred stock & $1.35B in 2 year notes. Buy / Buy
Sold $1.5B in 5 year floating rate debt. Buy / Buy
Reported quarterly earnings & sold $1B in perpetual preferred stock. Hold / Hold
Reported quarterly earnings. Buy / Buy
Reported quarterly earnings. Buy / Buy
Reported quarterly earnings. Buy / Buy
Reported quarterly earnings. Hold / Hold

April 19, 2013

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.15 0.11 0.04 0.32 -0.17
Taxable MMF 0.07 0.06 0.01 0.25 -0.18
2-Year Treasury 0.23 0.23 0.00 0.27 -0.04
5-Year Treasury 0.70 0.69 0.02 0.84 -0.14
10-Year Treasury 1.70 1.72 -0.02 1.97 -0.27
30-Year Treasury 2.88 2.92 -0.04 3.12 -0.24
5-Year Exp. Inflation 2.03 2.16 -0.12 1.88 0.15
2-Year Agency 0.31 0.30 0.01 0.38 -0.07
5-Year Agency 0.88 0.86 0.02 1.13 -0.25
10-Year Agency 2.13 2.15 -0.02 2.60 -0.47
2-Year Corporate* 0.66 0.63 0.03 1.29 -0.63
5-Year Corporate* 1.57 1.53 0.04 2.38 -0.81
10-Year Corporate* 2.89 2.90 0.00 3.75 -0.85
30-Year Corporate* 4.10 4.13 -0.03 4.80 -0.70
2-Year Municipal** 0.42 0.43 -0.01 0.51 -0.09
5-Year Municipal** 1.00 1.00 0.00 1.16 -0.16
10-Year Municipal** 2.16 2.22 -0.06 2.36 -0.20
30-Year Municipal** 3.99 4.00 -0.01 4.27 -0.28
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*** $82.74 $82.31 $0.43 $79.56 $3.18
CRB $283.19 $287.21 -$4.02 $299.30 -$16.11
Gold $1,400.70 $1,501.00 -$100.30 $1,640.60 -$239.90
Crude Oil $87.91 $91.29 -$3.38 $102.27 -$14.36
Unleaded Gasoline**** $2.77 $2.80 -$0.03 $2.95 -$0.18

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