Weekly Stock Market Update—May 31, 2013
By Steve Scranton, SVP, CFA
Chief Investment Officer

Stock Market Update

The equities market seemed to go on “central bank watch” this week, reacting positively or negatively to news that might directly or indirectly affect the Federal Reserve’s (Fed) future decisions related to its quantitative easing program. This heightened watchfulness led to a rise in volatility and the second consecutive week of negative performance. The Dow Jones Industrial Average (Dow) and the S&P 500 fell by 1.2% and 1.1%, respectively, for the overall week.

After the long holiday weekend, stocks moved up Tuesday in reaction to comments from the Bank of Japan and the European Central Bank (ECB) reaffirming that their accommodative programs would remain in place as long as necessary. This provided the market a one-day panacea to its worries about what the Fed will do. Tuesday marked the equity market’s high water mark for the week. For the remainder of the week, equity investors groped for news that might shed light on this question. Lack of data to provide an answer resulted in pressure on investor sentiment and bigger intra-day market swings.

On Thursday, a downward revision in first quarter GDP to 2.4% from 2.5% and a 10,000 increase in weekly initial jobless claims gave investors brief hope that disappointing economic data might convince the Fed to leave its stimulative actions unchanged. However, stocks moved sharply lower Friday on a day of light corporate and economic news. Investors seemed to become nervous as the day wore on and may have moved to lock in some profits. Also reportedly contributing to the day’s sell-off, several of the MSCI indexes were rebalanced for month-end. These pressures caused both the Dow and the S&P 500 to slide by 1.4% for the day.

Although posting losses for the past two weeks, the Dow and S&P 500 still have stellar gains. In May, both of the indices gained over 2% and year-to-date, the Dow is up 16%, while the S&P 500 is up 15%. But now what? Correction? Pullback? Resumption of this year’s tremendous rally? At the very least, it is likely that the market will be choppy over the near term while investors struggle with fear and uncertainty. The Fed’s quantitative easing activities have contributed to the market gains this year. So, one of the burning questions is whether or not the market will fall apart if these actions are scaled back or removed. As long as speculation and uncertainty persist regarding how the Fed might modify its stimulus program, it is likely that stock market volatility will remain elevated.

Current Week Month of may YTD
Dow Jones (INDU) -1.19% 2.24% 16.65%
S&P 500 (SPX) -1.11% 2.34% 15.37%
Nasdaq (CCMP) -0.08% 4.01% 15.05%
MSCI EAFE (EAFE) -0.51% -1.08% 9.67%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
COSTCO WHOLESALE CORP (COST) COST announced fiscal third quarter earnings of $1.04 per share, better than the consensus estimate of $1.03, and above earnings of $0.88 a year ago. Total revenue rose 8% to $24.1 billion, generally in-line with analysts' estimates of $24.2 billion. Unchanged
EMC CORP (EMC) EMC annnounced an increase to its share repurchase program to $6 billion, up from $1 billion, and will begin paying a $0.10 quarterly dividend, for a yield of approximately 1.6%. Unchanged

Fixed Income Update

The Fixed Income market has carried over its bias towards higher rates from last week. Weaker economic data is generally being ignored while anytime stronger economic data comes out, rates move higher.

A good example was Friday. Yields drifted lower in the face of weaker German retail sales but then started to rise as U.S. Personal Income and the Milwaukee purchasing managers’ report came in less than expected ( normally rates should decrease when economic reports are weaker than expected). Then a stronger Chicago Purchasing Managers’ report and University of Michigan confidence report sent yields higher. So normally all these reports should have had the net effect of stable rates. What we saw was rates increasing 7 basis points on an inter-day basis.

Right or wrong, investors are adjusting their expectations for the future pace of asset purchases by the Federal Reserve. Interest rates have moved dramatically this month, especially the last 2 weeks. Some Fixed Income investors, those that have reached for yield by investing in longer dated maturities, may see negative performance this month and that is something they are not used to seeing.

It is hard to believe that the Fed will be adjusting their actions as fast as the market is beginning to anticipate, but it is not uncommon for market action to exaggerate changes in the short run.

For the week, Treasury yields ranged from increasing 5 to 15 basis points.

Company Spotlight

Reported quarterly earnings. Buy / Buy
Sold $4B in a five-part debt offering. Buy / Buy

May 31, 2013

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.12 0.14 -0.02 0.28 -0.16
Taxable MMF 0.03 0.03 0.00 0.22 -0.19
2-Year Treasury 0.30 0.25 0.05 0.26 0.04
5-Year Treasury 1.04 0.89 0.15 0.66 0.38
10-Year Treasury 2.14 2.01 0.13 1.56 0.58
30-Year Treasury 3.28 3.17 0.11 2.64 0.64
5-Year Exp. Inflation 1.90 1.96 -0.06 1.73 0.17
2-Year Agency 0.36 0.32 0.04 0.42 -0.05
5-Year Agency 1.16 1.06 0.11 1.00 0.16
10-Year Agency 2.52 2.41 0.11 2.23 0.30
2-Year Corporate* 0.69 0.63 0.05 1.43 -0.74
5-Year Corporate* 1.84 1.72 0.12 2.35 -0.51
10-Year Corporate* 3.28 3.16 0.13 3.49 -0.21
30-Year Corporate* 4.49 4.37 0.12 4.52 -0.03
2-Year Municipal** 0.45 0.42 0.03 0.51 -0.06
5-Year Municipal** 1.13 1.07 0.06 1.05 0.08
10-Year Municipal** 2.38 2.32 0.06 2.25 0.13
30-Year Municipal** 4.18 4.15 0.03 4.19 -0.01
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*** $83.26 $83.70 -$0.44 $83.04 $0.22
CRB $281.85 $284.89 -$3.04 $272.97 $8.88
Gold $1,385.50 $1,386.60 -$1.10 $1,562.60 -$177.10
Crude Oil $91.66 $94.15 -$2.49 $86.53 $5.13
Unleaded Gasoline**** $2.78 $2.84 -$0.06 $2.57 $0.21

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