Weekly Stock Market Update—June 7, 2013
By Steve Scranton, SVP, CFA
Chief Investment Officer

Stock Market Update

Volatility remained elevated this week, on continued worries about the Federal Reserve’s (Fed) future plans for its quantitative easing program. During the week, there were three days in which either the Dow Jones Industrial Average (Dow) or the S&P 500, or both, were up or down by at least 1%. These swings were driven by reaction to the following:

  • Monday—Dow up 1%; S&P 500 up 0.6%. The Institute for Supply Management (ISM) reported that its manufacturing index for May came in weaker than expected at 49.0 versus the expected reading of 51.0. This decline fueled hope that the Fed will leave the economic stimulus program unchanged.
  • Wednesday—Dow down 1.4%; S&P 500 down 1.4%. The ISM’s services (nonmanufacturing) index for May came in a little better than expected, at 53.7, while April factory orders came in lower than expected, at 1.0%. The ADP employment report showed that the private sector added a fewer than expected 135,000 jobs during May versus expected additions of 165,000. The Fed also released its Beige Book, commenting that economic activity expanded at a “modest to moderate pace” (a slight downgrade from the previous report). But, the Fed described manufacturing activity as positive. The day’s mixed data left equity investors confused and uncertain.
  • Friday—Dow up 1.4%; S&P 500 up 1.3%. The non-farm payrolls report was seen as the most important economic data of the week, particularly since the Fed has noted that improvements in the job market need to be seen before it will consider scaling back its stimulus activities. The Bureau of Labor Statistics reported that non-farm payrolls for May increased by 175,000, better than the expected addition of 163,000 jobs. However, non-farm payrolls for April were revised lower—to 149,000 from the prior report of 165,000 additions. The unemployment rate rose to 7.6% from the prior 7.5%. The market’s strong rally in reaction to this data would imply that investors feel the employment picture is not strong enough yet to warrant a change in the Fed’s quantitative easing program.

Although the Dow and S&P 500 were up 0.9% and 0.8%, respectively, for the overall week, uncertainty surrounding the Fed’s quantitative easing program continues to weigh on investor psychology. A picture can sometimes be worth a thousand words. The Chicago Board Options Exchange Market Volatility Index (known as the VIX), is one of the most popular measures of implied volatility for the stock market and measures the expectation of volatility over the next 30 day period. As shown below, the VIX index has risen meaningfully since mid-May as investors struggle to figure out the future. We expect volatility to remain extended until there is greater clarity around the Fed’s next moves–or lack thereof.

Chart
Current Week Month of may YTD
Dow Jones (INDU) 0.92% 0.92% 17.73%
S&P 500 (SPX) 0.83% .83% 16.33%
Nasdaq (CCMP) 0.41% 0.41% 15.52%
MSCI EAFE (EAFE) -1.09% -1.09% 7.17%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
APPLE INC (AAPL) The U.S. International Trade Commission found that AAPL infringed on a patent owned by Samsung, related to 3G wireless, and announced a limited ban on some devices. Unchanged
UNITEDHEALTH GROUP INC (UNH) UNH increased the quarterly cash dividend to $0.28 per share, up from $0.2125/share. Additionally, the Board of Directors renewed the company's repurchase program, authorizing the purchase of 110 million shares. Unchanged
PIONEER NATURAL RESOURCES CO.(PXD) On 06/05/2013 we purchased Pioneer Natural Resources (PXD) for the Large Cap Equity portfolio. Unchanged
COSTCO WHOLESALE CORP (COST) COST reported comparable store sales, for the month of May, rose 5%, below the consensus estimate of 5.5%. Unchanged

Fixed Income Update

Fixed Income investors continue to be caught between policies where major central banks are either full steam ahead on their asset purchase programs or planning to wind them down.

Japanese bonds have been fluctuating as current Bank of Japan (BOJ) policy is not satisfying investors at the pace they would like. European bond yields increased as European Central Bank (ECB) President Mario Draghi signalled that no further monetary stimulus is imminent. And in the U.S., concern of the Federal Reserve (Fed) tapering their asset purchase program continues. Economic reports have done little to clarify the environment for investors. Friday’s employment report was neither strong enough to cause the Fed to purchase less assets nor weak enough to alleviate the fears of tapering.

To put the Fed’s quantitative easing program into perspective and to dramatize its importance, it is helpful to know what percentage of the market it represents. Currently, the Fed is buying $85 billion in assets every month. They are purchasing $45 billion in Treasury securities and $40 billion in mortgage-backed securities. The Fed is buying 70% of the new issuance of Treasuries every month. The month of April saw $59 billion of net issuance of mortgage-backed securities of which the Fed bought $40 billion.

Markets are anticipatory. The laws of supply and demand state that if demand decreases (Fed tapering) and supply stays the same, prices fall. In the bond world when prices fall, yields rise.

For the week, Treasury yields increased 1 to 7 basis points.

Company Spotlight

WAL-MART STORES INC (WMT)
Aa2/AA/AA
Announced a new $15B share buyback program. Buy / Buy

June 7, 2013

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.09 0.12 -0.03 0.27 -0.18
Taxable MMF 0.03 0.03 0.00 0.22 -0.19
2-Year Treasury 0.30 0.30 0.01 0.27 0.03
5-Year Treasury 1.09 1.02 0.07 0.71 0.38
10-Year Treasury 2.17 2.13 0.04 1.64 0.53
30-Year Treasury 3.33 3.28 0.05 2.74 0.59
5-Year Exp. Inflation 1.90 1.90 0.01 1.77 0.14
2-Year Agency 0.37 0.37 0.00 0.41 -0.05
5-Year Agency 1.18 1.18 0.00 1.07 0.11
10-Year Agency 2.50 2.54 -0.05 2.31 0.19
2-Year Corporate* 0.73 0.69 0.04 1.46 -0.74
5-Year Corporate* 1.89 1.85 0.03 2.43 -0.54
10-Year Corporate* 3.29 3.30 -0.01 3.60 -0.30
30-Year Corporate* 4.51 4.50 0.00 4.65 -0.15
2-Year Municipal** 0.51 0.45 0.06 0.48 0.03
5-Year Municipal** 1.23 1.14 0.09 1.04 0.19
10-Year Municipal** 2.48 2.39 0.09 2.23 0.25
30-Year Municipal** 4.27 4.18 0.09 4.19 0.08
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*** $81.69 $83.38 -$1.69 $82.05 -$0.36
CRB $287.67 $281.85 $5.82 $274.01 $13.66
Gold $1,378.90 $1,392.60 -$13.70 $1,586.60 -$207.70
Crude Oil $96.16 $91.97 $4.19 $84.82 $11.34
Unleaded Gasoline**** $2.87 $2.75 $0.12 $2.51 $0.36

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