Weekly Stock Market Update—May 3, 2013
By Steve Scranton, SVP, CFA
Chief Investment Officer

Stock Market Update

Relentless rally. That has been the theme of the domestic equity market for some time now. In fact, since November 15, 2012, the S&P 500 has risen 20% and since June 4, 2012 has gained 29%.

Chart

This week's market action added on to that story. The Dow Jones Industrial Averate (Dow) rose by an impressive 1.8%, while the S&P 500 gained a strong 2.1%. The following events acted to keep optimism alive and well for equity investors this week:

— Italy announced a new government.

  • Italy finally formed a new government, ending months of uncertainty, about whether this could be achieved and raising hope for improvement in its debt situation and growth prospects.

—U.S. and European monetary policy meetings.

  • The Federal Reserve (Fed) held its two-day policy meeting. Comments after the meeting reaffirmed that it will continue bond purchasing activities to keep interest rates low and stimulate economic activity. The European Central Bank (ECB) also delivered favorable news when it announced that interest rates will be lowered for the first time in 10 months and noted teh possibility of further action if necessary to aid the euro zone economy. These moves increased equity investors' confidence that central banks are committed to taking the steps necessary to achieve economic stability.

—Employment data.

  • On Thursday, initial jobless claims data came in better than expected, with initial claims declining by 18,000 versus the prior week–to 324,000 compared to the expected reading of 345,000. Then on Friday, the monthly employment report provided positive news. The Bureau of Labor Statistics (BLS) reported that employers added 165,000 new jobs in April— much better than the anticipated additions of 140,000. It also upwardly revised both the February and March figures. In addition, the unemployment rate declined to 7.5% from 7.6% last month. The Dow and S&P 500 both rallied by 1% on this news.

—Economic data.

  • Pending home sales in March and the S&P/Case Shiller home price index for February both came in better than expected. In addition, the Institute for Supply Management’s (ISM) manufacturing index came in above estimates.

Some disappointing economic data during the week took a back seat to the positive news discussed above: March factory orders, the ISM services index for April, March construction spending, and the ADP employment report all came in below expectations. Corporate earnings season news has also been mixed. Though many earnings reports have been higher than expected, many companies have also reported little or no revenue growth. Nevertheless, the stock market surged this week, as the Fed reaffirmed its support of the economy and the most recent employment data painted an improved picture.

Current Week Month of may YTD
Dow Jones (INDU) 1.79% 0.92% 15.15%
S&P 500 (SPX) 2.06% 1.08% 13.95%
Nasdaq (CCMP) 3.07% 1.53% 12.30%
MSCI EAFE (EAFE) 0.58% -0.88% 9.86%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
JPMORGAN CHASE & CO (JPM) JPM announced co-Chief Operationg Officer Matt Zames will become sole COO, as Frank Bisignano is leaving the company. Unchanged
EXPRESS SCRIPTS HOLDING CO (ESRX) ESRX reported first quarter earnings of $0.99 per share, which topped Wall Streets estimate of $0.97. Revenue jumped to $26 billion, up from $12 billion in 1Q 2012, and exceeded analysts' expectations of $25.6 billion. In conjunction with the earnings release the company increased its 2013 earnings guidance. Unchanged
INTL BUSINESS MACHINES CORP (IBM) IBM raised its quarterly cash dividend to $0.95 per share, from $0.85, and added $5 billion to its current stock repurchase program. Unchanged
JACOBS ENGINEERING GROUP INC (JEC) Reported fiscal first quarter earnings of $0.80 per share, below the consensus estimate of $0.83, and compared with earnings of $0.65 per share a year ago. Unchanged
INVESCO LTD (IVZ) IVZ reported first quarter earnings of $0.52 per share, better the Steet expectation of $0.45, growing 18% year-over-year. Additionally, the company raised its quarterly cash dividend to $0.225 per share, up from $0.173, for a yield of approximately 2.9%. Unchanged
PRAXAIR INC (PX) Frst quarter earnings of $1.38 per share matched the consensus estimate. Unchanged
NEXTERA ENERGY INC (NEE) First quarter earnings of $1.12 per share were $0.10 above analysts' estimates, and compared with $1.02 in the year ago quarter. Management reaffirmed its 2013 earnings guidance. Unchanged
APPLE INC (AAPL) The company offered $17 billion of fixed and floating rate notes to help fund a $100 billion capital return program for shareholders. Unchanged
AMERICAN TOWER CORP (AMT) First quarter earnings of 0.43 per share were below the Street estimate of $0.47. Revenues rose 15% (y/y) to $802 billion, better than analysts' expectations of $791 million. Management raised its full year 2013 guidance. Unchanged
PRUDENTIAL FINANCIAL INC (PRU) The company reported first quarter operating earnings of $2.28 per share, well above estimates of $1.88, and compared to earnings of $1.56 in the year earlier quarter. Revenues of $11.8 billion were below the average revenue estimate of $12.4 billion. Unchanged
NATIONAL OILWELL VARCO INC (NOV) Shares of National Oilwell Varcoo (NOV) were recently placed on hold, to be replaced , in the future, with shares of Valero Energy Corporation (VLO). Hold
MYLAN INC (MYL) Mylan reported first quarter operating earnings of $0.62 per share, above analysts' average estimatesof $0.61. Revenues rose 3% (y/y) to $1.63 billion, just short of Wall Street estimates of $1.69 billion. Unchanged

Fixed Income Update

The Fixed Income market spent most of the week following the same pattern that we have seen since mid-March. Since that time, yields have been on a steady trudge lower as economic numbers continued to disappoint. Fixed Income investors focused on the Federal Reserve’s Open Market Committee (FOMC) meeting on Wednesday and Friday’s employment report for clues on the future direction of interest rates.

The FOMC meeting gave an implicit acknowledgment of the softening data by stating that it is prepared to increase or reduce the pace of purchases as the labor market and or inflation outlooks change. Several Fed officials in the week prior indicated their willingness to ease if data disappoint persistently. With the Fed missing on both sides of its dual mandate (full employment and price stability), the market expected the Fed to continue to back away from a quick tapering to QE3. The FOMC did not make much of a change to their assessment of the economy, citing a "moderate expansion" in activity and "some improvement, on balance" in the labor market, despite a weak March employment report. They noted that fiscal policy "is restraining" growth (in March, it had "become somewhat more restrictive"). All in all, the report had few surprises.

Friday’s employment did surprise investors who had grown accustomed to disappointing numbers. Expectations were for a gain of 140,000 with most estimates centered in the +120,000 to +140,000 range. The actual number came in at +165,000. March’s dismal gain of 88,000 was revised upward by 50,000 to 138,000.

It will be important to see the next batch of economic numbers to see if the soft patch continues or does the employment report portend a change back to stronger growth?

For the week, Treasury yields ranged between unchanged to increasing 10 basis points.

Company Spotlight

MCDONALD'S CORP (MCD)
A2/A/A
Issued $500M in 30 year bonds. Buy / Buy
US BANCORP (USB)
A1/A+/AA
Issued $250M in perpetual preferred stock. Buy / Buy
CONOCOPHILLIPS (COP)
A1/A/A
Issued $700M in 5 and 10 year notes. Buy / Buy
BOEING CO/THE (BA)
A2/A/A
Issued $500M in 18 mo floating rate notes, and 5 year fixed rate notes. Buy / Buy
MERCK & CO. INC. (MRK)
A1 *-/AA/A+
Reported quarterly earnings. Buy / Buy
INTEL CORP (INTC)
A1/A+/A+
Current CEO Paul Otellini will be retiring on May 16; COO Brian Krzanich was named as his replacement. Buy / Buy
INTL BUSINESS MACHINES CORP (IBM)
Aa3/AA-/A+
Issued $2.25 billion in 3 and 7 year notes. Buy / Buy
OCCIDENTAL PETROLEUM CORP (OXY)
A1/A/A
Chairman Ray Irani was voted out by shareholders at the annual meeting, forcing him to resign his board seat. Buy / Buy

May 3, 2013

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.18 0.19 -0.01 0.33 -0.15
Taxable MMF 0.06 0.06 0.00 0.23 -0.17
2-Year Treasury 0.22 0.21 0.00 0.26 -0.04
5-Year Treasury 0.73 0.68 0.04 0.82 -0.10
10-Year Treasury 1.74 1.66 0.08 1.93 -0.19
30-Year Treasury 2.96 2.86 0.10 3.12 -0.16
5-Year Exp. Inflation 2.06 2.13 -0.07 2.03 0.03
2-Year Agency 0.29 0.29 0.00 0.35 -0.06
5-Year Agency 0.83 0.85 -0.02 1.09 -0.26
10-Year Agency 2.08 2.11 -0.02 2.56 -0.48
2-Year Corporate* 0.61 0.62 -0.02 1.25 -0.64
5-Year Corporate* 1.49 1.52 -0.03 2.32 -0.82
10-Year Corporate* 2.82 2.86 -0.04 3.68 -0.86
30-Year Corporate* 4.05 4.09 -0.04 4.77 -0.71
2-Year Municipal** 0.40 0.42 -0.02 0.49 -0.09
5-Year Municipal** 0.96 1.01 -0.05 1.09 -0.13
10-Year Municipal** 2.12 2.12 0.00 2.27 -0.15
30-Year Municipal** 3.95 3.99 -0.04 4.23 -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*** $82.11 $82.50 -$0.39 $79.22 $2.89
CRB $290.17 $285.40 $4.77 $301.46 -$11.29
Gold $1,468.10 $1,453.60 $14.50 $1,634.80 -$166.70
Crude Oil $95.45 $93.00 $2.45 $102.54 -$7.09
Unleaded Gasoline**** $2.82 $2.83 -$0.01 $2.87 -$0.05

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