Weekly Stock Market Update—May 24, 2013
By Steve Scranton, SVP, CFA
Chief Investment Officer

Stock Market Update

After four uninterrupted weeks of gains, the stock market posted negative performance this week. The Dow Jones Industrial Average (Dow) gave back 0.3%, while the S&P 500 lost 1.0%. Early on, there was little news to inspire market movements in either direction, so stocks treaded water as investors waited for Federal Reserve (Fed) events which were set to occur later in the week.

The downward pressure occurred in the second half of the week as investors reacted to the following:

  • Testimony by Fed Chairman Ben Bernanke before the Congressional Joint Economic Committee. During his comments, Chairman Bernanke noted that the Fed could decide to scale back the pace of bond purchases at one of the “next few meetings” if the economic recovery looked set to maintain forward momentum.
  • Minutes from the Fed’s most recent policy meeting. Minutes from this meeting highlighted that some officials were open to tapering back its quantitative easing activities as early as the June meeting, but that disagreement remained regarding what economic conditions would drive such a decision. One official wanted to begin scaling back the bond purchases immediately, while another wanted to add more accommodation immediately. Overall, the members felt it was important to be prepared to adjust the pace up or down in response to incoming data and that they will need to see more signs of sustained improvement in the economy and the labor market before reducing bond purchases.

Much of the stock market's meteoric rally this year has been attributed to the Fed’s efforts to support the economy through its quantitative easing program. So, it should not come as a big surprise that the equities market might react to even the slightest hint that the pace of these stimulative efforts could change. The Fed has been clear to communicate that it will not make changes to this program until it is convinced that the economy can function sustainably without its support. However, recall that the stock market loathes uncertainty. An increased level of uncertainty combined with significant gains occurring over such a short time frame could easily give rise to profit taking. It would not be surprising to see volatility rise as equity investors continue to assess the Fed’s evolving stance on its stimulus program and potential changes that could occur in the currently unclear future.

Current Week Month of may YTD
Dow Jones (INDU) -0.27% 3.46% 18.06%
S&P 500 (SPX) -1.04% 3.49% 16.67%
Nasdaq (CCMP) -1.13% 4.10% 15.14%
MSCI EAFE (EAFE) -1.59% -0.55% 10.26%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
NATIONAL OILWELL VARCO INC (NOV) NOV increased the quarterly dividend to $0.26 per share, up from $0.13/share, for a yield of approximately 1.49%. Unchanged
HOME DEPOT INC (HD) HD reported first quarter adjusted earnings of $0.83 per share, up 22% (y/y), and $0.06 better than the Street estimate of $0.77/share. In conjunction with the earnings release the company raised its fiscal 2013 earnings, revenue, and comparable store sales guidance. Unchanged
MEDTRONIC INC (MDT) Reported fiscal Q4 earnings of $1.10, above the consensus estimate of $1.03 per share. Revenues rose 3.8% (y/y) to $4.5 billion, exceeding analyts' expecations of $4.3 billion. Unchanged
PHILIP MORRIS INTERNATIONAL (PM) PM has agreed to purchase Grupo Carso's 20% interest in Philip Morris Mexico for approximately $700 million. Following the transaction, Philip Morris will own all of its Mexican operations. The deal is expected to close by Sept. 30, 2013. Unchanged
JPMORGAN CHASE & CO (JPM) Announced preliminary results of the shareholder proposals, noting that Chairman and CEO Jamie Dimon will keep the chairman title. Separately, JPM increased the quarterly cash dividend to $0.38 per share, up from the prior $0.30/share. Unchanged
PROCTER & GAMBLE CO/THE (PG) PG announced that Alan G. Lafley has rejoined the company as President and CEO, effective immediately. He will also serve as Chairman of the Board. Unchanged

Fixed Income Update

Following the Bernanke testimony and the ambiguity on a possible Fed pull back from the current pace of balance sheet expansion (QE) and poorly placed comments from the Bank of Japan, there has been a wave of global profit taking on long risk positions that has morphed into a broad cutting of positions in stock and bond markets. This has been most evident in Japan. We have seen wide fluctuations in the Nikkei, Yen, and the JGB’s (Japanese bonds).

Bernanke’s testimony, whether interpreted accurately or not, was widely viewed as opening the door to slowing the pace of Fed balance sheet expansion. The key quote being, "If we see continued improvement and we have confidence that that's going to be sustained then we could in the next few meetings ...take a step down in our pace of purchases. If we do that it would not mean that we are automatically aiming towards a complete wind down. Rather we would be looking beyond that to see how the economy evolves and we could either raise or lower our pace of purchases going forward." The comment left market participants wondering as to whether he is opening the door to a near term drop in the pace of QE or indicating that there is no timetable whatsoever on the pullback.

Subsequent newspaper reports raised the possibility the FOMC would be discussing tapering in the June meeting. Hawks have been advocating tapering or stopping QE for some time, however they remain nowhere near having the votes to influence policy any time soon. It also seems that the Fed exit discussions are now focused on how to avoid the initial taper being seen as a signal for an inexorable sequence of tapering. Investors are so conditioned on a Fed that keeps on easing that any discussion of a deceleration is coming as a shock. So the first shock, it seems, has been the realization that the global liquidity deluge may one day come to an end.

It will be important to see if this initial reaction, which has been dominated by institutional/leveraged accounts, continues to push rates higher or if domestic economic conditions weaken, solidifying further QE.

For the week, Treasury yields ranged from unchanged to increasing 6 basis points.

Company Spotlight

Aa3/AA-/#N/A N/A
Announced this week, P&G's former CEO A.G. Lafley will replace current CEO Bob McDonald, effective immediately. Buy / Buy

May 24, 2013

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.14 0.14 0.00 0.30 -0.16
Taxable MMF 0.04 0.04 0.00 0.23 -0.19
2-Year Treasury 0.25 0.24 0.00 0.30 -0.05
5-Year Treasury 0.89 0.83 0.06 0.78 0.10
10-Year Treasury 2.01 1.95 0.05 1.78 0.23
30-Year Treasury 3.17 3.17 0.01 2.87 0.30
5-Year Exp. Inflation 1.96 2.01 -0.05 1.82 0.14
2-Year Agency 0.32 0.32 0.01 0.44 -0.11
5-Year Agency 1.07 1.01 0.06 1.11 -0.04
10-Year Agency 2.43 2.37 0.07 2.43 0.00
2-Year Corporate* 0.62 0.62 0.00 1.45 -0.83
5-Year Corporate* 1.70 1.65 0.05 2.46 -0.76
10-Year Corporate* 3.15 3.09 0.05 3.70 -0.55
30-Year Corporate* 4.38 4.36 0.02 4.74 -0.36
2-Year Municipal** 0.41 0.43 -0.02 0.47 -0.06
5-Year Municipal** 1.07 1.05 0.02 1.05 0.02
10-Year Municipal** 2.30 2.24 0.06 2.23 0.07
30-Year Municipal** 4.13 4.08 0.05 4.19 -0.06
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*** $83.65 $84.25 -$0.60 $82.35 $1.30
CRB $285.10 $287.60 -$2.50 $281.92 $3.18
Gold $1,387.10 $1,364.70 $22.40 $1,557.50 -$170.40
Crude Oil $94.20 $96.02 -$1.82 $90.66 $3.54
Unleaded Gasoline**** $2.84 $2.91 -$0.07 $2.66 $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