Weekly Stock Market Update—June 28, 2013
By Steve Scranton, SVP, CFA
Chief Investment Officer

Stock Market Update

Equity market participants were immersed in scrutinizing economic data and central bankers’ comments this week. The search for clues about the future brought market movements for the Dow Jones Industrial Average (Dow) in excess of 100 points every day. It also highlighted the conundrum of how economic data and central banks’ actions are being interpreted on differing days. Most of these interpretations occurred this week:

  1. “Good news = bad news” (better economic data could cause the Federal Reserve (Fed) to taper its economic stimulus program sooner than later, possibly causing the economy and market to fall).
  2. “Bad news = good news” (disappointing economic data could result in the Fed holding off on moves to taper stimulus activities).
  3. “Good news = good news” (better economic data shows the economy is strong enough to withstand the removal of stimulative support).
  4. “Bad news = bad news” (central banks’ comments/plans are not accommodative enough to avert a future economic weakening).

Monday“Bad news = bad news”
The Dow fell by 0.9% (down 139 points), while the S&P 500 dropped by 1.2% on fresh concern about the outlook for China’s economic growth prospects. The Chinese central bank said it will not inject liquidity into its banking system to avoid a credit crunch (in an effort to rein in speculative activities). Also, on Monday the equity market officially experienced a “pullback” (a 5% decline), which was the first one since November.

Tuesday"Good news = good news”
The Dow rose by 0.7% (up 100 points) and the S&P 500 gained 0.9%. Better than expected economic reports on durable goods orders, consumer confidence, home prices, and new home sales bolstered hope that the economy might be strong enough to withstand removal of the Fed’s stimulus actions. Calming words from China also helped alleviate Monday’s concern (the Chinese central bank noted that it will provide cash to any banks with shortages).

Wednesday"Bad news = good news”
The Dow and S&P 500 each gained 1% (Dow up 149.83 points). An unexpected downward revision in the growth rate of first quarter GDP fueled investors’ hopes that the weaker data might influence the Fed to taper its stimulus program later rather than sooner.

Thursday"Bad news = good news”
The Dow rose by 0.8% (up 114 points) and the S&P 500 gained 0.6%. Stocks climbed for a third straight day in reaction to comments from three Fed officials. They stressed that any future tapering of the stimulus program remains contingent on evolving economic conditions. (The bad news in this message: if economic data is bad, then the Fed may not taper its stimulus program, nor would they enact a too-hasty end to it).

Friday"No news is no news”
The Dow lost 0.7% (down 114 points) and the S&P 500 declined by 0.4%. Although there was little economic, central bank or corporate news, the Dow had another triple digit move–this time to the downside–to close out the second quarter of 2013.

It was rather interesting to watch how investors interpreted data throughout the week–and how it affected market performance. Overall, we think this week continues to illustrate the nervousness that remains embedded in sentiment. This is likely to keep volatility elevated as vacillation continues between what good and bad news mean in the context of equity investors’ uncertain view of the future.

Current Week Month of may YTD
Dow Jones (INDU) 0.74% -1.25% 15.20%
S&P 500 (SPX) 0.91% -1.34% 13.82%
Nasdaq (CCMP) 1.41% -1.42% 13.42%
MSCI EAFE (EAFE) 0.78% -3.62% 4.42%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
ORACLE CORP (ORCL), MICROSOFT CORP (MSFT) ORCL announced a long-term strategic partnership with Salesforce.com (CRM) to supply its hardware to power CRM's cloud applications. Separately, Oracle also announced an agreement with MSFT to support versions of its database and Java software, on Microsoft's infrastructure, as a service Azure cloud platform. Unchanged
BED BATH & BEYOND INC (BBBY) BBBY reported fiscal first quarter operating earnings of $0.92 per share, missing analysts' average estimate of $0.93. Sales rose 17.8% to $2.61 billion, slightly above the consensus estimate of $2.60 billion. Unchanged
CHEVRON CORP (CVX) CVX announced an agreement with Cimarex to the joint development of Delaware Basin acreage in Texas. Under the agreement CVX will pay $60 million, and contribute acreage, for a 50% stake Cimarex' gas gathering, processing, and wells drilled in 2013. Unchanged

Fixed Income Update

The sell-off in the markets has been swift and strong since the Fed’s last FOMC meeting. Both the markets and many forecasters have brought forward tapering to September. Even more telling, despite Bernanke’s strong attempts to separate the QE and rates policy decisions (ending the former is stepping off the gas and starting the latter is stepping on the brakes) the market continues to pull forward the date of the first rate hike, now to late 2014.

The Fixed Income market started the week in very volatile fashion with the 10- year Treasury note reaching a high yield of 2.66% on Monday. From that time, investors, though nervous and skittish, seemed to reconsider what the Fed actually said. Additionally, a number of Fed officials started to express their opinions. The main point of the Fed official’s comments indicates that investors may have overreacted to the prospects for a reduction in the central’s banks bond buying program. As can be seen in the chart below, yields have seemed to consolidate for the 10-year Treasury around 2.50% for now.

As a result of the perceived change in monetary policy, bond mutual funds and exchange traded funds (ETF’s) continue to see large outflows. Investors redeemed $4.53 billion out of U.S. municipal bond mutual funds in the week ending June 26th. U.S. government –mortgage mutual funds had $1.16 billion in outflows, U.S. corporate investment grade mutual funds had $2.32 billion of outflows, U.S. high yield bond funds had $3.12 billion in out-flows, and bucking the trend, U.S. government Treasury mutual funds added $528 million. Emerging markets continue to see the greatest volatility. Emerging market bond mutual funds and ETF’s saw $2.42 billion outflows from local currency funds and $2.59 billion from hard currency funds. Hard currency means the foreign debt is issued in dollars, yen, or euros. Local currency means the foreign debt is issued in the local currency. Even though mutual fund outflows have been large, we have seen some stability in the performance of the various bond funds this week.

For the week, Treasury yields decreased 1 to 8 basis points.

Graph Weekly Market Update 6.28.13

Company Spotlight

PEPSICO INC (PEP)
A1/A/A
Moody's downgraded the firms debt rating from Aa3 to A1. Buy / Buy

June 28, 2013

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.07 0.08 -0.01 0.26 -0.19
Taxable MMF 0.02 0.03 -0.01 0.20 -0.18
2-Year Treasury 0.36 0.37 -0.01 0.30 0.05
5-Year Treasury 1.39 1.43 -0.03 0.69 0.70
10-Year Treasury 2.48 2.53 -0.05 1.58 0.91
30-Year Treasury 3.50 3.58 -0.08 2.68 0.82
5-Year Exp. Inflation 1.77 1.67 0.10 1.66 0.10
2-Year Agency 0.51 0.51 0.00 0.42 0.09
5-Year Agency 1.62 1.65 -0.03 1.02 0.60
10-Year Agency 2.99 3.02 -0.02 2.23 0.76
2-Year Corporate* 0.90 0.89 0.01 1.06 -0.16
5-Year Corporate* 2.35 2.37 -0.03 1.92 0.42
10-Year Corporate* 3.82 3.83 -0.01 3.13 0.69
30-Year Corporate* 4.87 4.89 -0.02 4.25 0.62
2-Year Municipal** 0.73 0.54 0.19 0.45 0.28
5-Year Municipal** 1.72 1.37 0.35 1.12 0.60
10-Year Municipal** 3.15 2.71 0.44 2.31 0.84
30-Year Municipal** 4.93 4.48 0.45 4.24 0.69
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*** $83.17 $82.32 $0.85 $82.81 $0.36
CRB $275.62 $278.08 -$2.46 $271.81 $3.81
Gold $1,231.50 $1,291.60 -$60.10 $1,550.40 -$318.90
Crude Oil $96.50 $93.69 $2.81 $77.69 $18.81
Unleaded Gasoline**** $2.72 $2.75 -$0.03 $2.33 $0.39

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