Weekly Stock Market Update—August 16, 2013
By Steve Scranton, SVP, CFA
Chief Investment Officer

Stock Market Update

Where have the summer doldrums gone? The market’s pre-occupation with potential future moves by the Federal Reserve (Fed) seems to have stolen the quiet behavior typically seen by equities during mid- to late-August. Last week, the major indices lost a little more than 2% because of resurgence in speculation and concern about a possible tapering in economic stimulus actions by the Fed. The same was true for the markets this week. The Dow Jones Industrial Average (Dow) lost 2.04%, while the S&P 500 declined by 2.12%, as uncertainty around future Fed actions continued to shape the tone of the equities market.

The week got off to a lackluster start and stocks were little changed, on light economic and corporate news. Investors paused to consider comments from some Fed officials last week which suggested that economic stimulus actions could be scaled back starting as early as September if the economy continues to improve. Adding to that picture, on Tuesday Atlanta Fed President Dennis Lockhart said the Fed could announce a reduction in its bond purchases as early as next month. However, he also noted that the data has been too mixed to outline a detailed exit strategy at this point.

Equity market behavior accelerated to the downside starting Wednesday, after St. Louis Fed president Bullard said the Fed will gather evidence on economic activity to aid in timing any tapering decisions. Thursday brought the most difficult day of performance. The Dow dropped by 1.5% and the S&P 500 lost 1.4% on a combination of corporate and economic news. The data suggested improvements in the employment picture and hinted at pockets of pricing power, which could ease concerns among some Fed officials that inflation was too low–thus possibly reducing arguments against initiating tapering stimulus activities in September. Adding to investor uneasiness, two bellwether companies, Wal Mart (WMT) and Cisco Systems (CSCO) made disappointing comments regarding the future when releasing their quarterly results. WMT’s comments suggested that consumer spending is not robust even though inflation seems to be ticking up. Meanwhile, CSCO announced a 5% reduction in its workforce because it is not seeing its expected level of demand for its products.

“All things Fed” seems be at the forefront of equity investors’ minds right now. They will continue to watch closely for clues about when, and by how much, the Fed will begin to wind down its $85 billion per month bond purchase program, which has helped drive the strong equity market returns this year. While there seems to be a growing view that the Fed has made up its mind to wind down its stimulus measures and that the real question is the timeline, this is very unsettling to an investor group that loathes uncertainty. This uncertainty will keep equity investors on pins and needles until the timeline becomes clearer.

Current Week Month of August YTD
Dow Jones (INDU) -2.12% -2.45% 17.00%
S&P 500 (SPX) -2.04% -1.61% 17.69%
Nasdaq (CCMP) -1.51% -0.50% 20.34%
MSCI EAFE (EAFE) -0.55% 2.03% 12.33%

Updates to the Equities Buy List:

There are no updates to the Equities Buy List this week

Fixed Income Update

For most of the week, the better than expected economic data coming out of Europe was the main driver of U.S. interest rates. The ZEW Eurozone expectation of economic growth, a measure of consumer confidence, was reported much higher at 44 versus the prior 32.8 and GDP for France and Germany were stronger than expected. Better growth prospects in Europe and thus less risk of sovereign default in Italy and Spain has decreased the safety premium built in German and U.S. rates.

Economic data in the U.S. also caught the attention of investors. Investors viewed the economic news as more support for the Fed to decrease their asset purchases (taper) as soon as September. Presently, economic numbers that show a growing economy are re-enforcing the belief of a Fed taper while any number that disappoints is being discounted.

U.S. Treasury data on international capital flows (TIC) for the month of June showed another weak month of inflows into U.S. securities. Although this number can be volatile month to month, this is the fourth straight month of outflows. For the month of June, there was an outflow of $67 billion in long term securities. This is actually understated since it includes $11 billion of net inflows associated with selling of foreign stocks and bonds by domestic investors. Stripping out this component, foreigners sold a total of $78 billion worth of Treasury, agency, and corporate bonds in June. In the face of the selloff witnessed in emerging markets where one would expect to see some flight to safety, this did not happen as $41 billion of outflow was associated with foreign selling of U.S. Treasuries. As foreign ownership of U.S. debt is so great, this data warrants growing attention.

For the week, yields of U.S. Treasury securities increased 4 to 25 basis points.

Company Spotlight

CISCO SYSTEMS INC (CSCO)
A1/A+/#N/A N/A
Reported quarterly earnings. Buy / Buy
WAL-MART STORES INC (WMT)
Aa2/AA/AA
Reported quarterly earnings. Buy / Buy
JPMORGAN CHASE & CO (JPM)
A2/A/A+
Sold $750 million of 30 year bonds. Buy / Buy

August 16, 2013

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.07 0.06 0.01 0.21 -0.14
Taxable MMF 0.02 0.01 0.01 0.17 -0.15
2-Year Treasury 0.34 0.30 0.04 0.29 0.05
5-Year Treasury 1.56 1.36 0.21 0.82 0.75
10-Year Treasury 2.83 2.58 0.25 1.84 0.99
30-Year Treasury 3.84 3.64 0.21 2.95 0.89
5-Year Exp. Inflation 1.80 1.93 -0.13 1.89 -0.09
2-Year Agency 0.45 0.39 0.06 0.40 0.06
5-Year Agency 1.80 1.62 0.19 1.13 0.67
10-Year Agency 3.41 3.20 0.20 2.45 0.96
2-Year Corporate* 0.80 0.75 0.04 0.82 -0.02
5-Year Corporate* 2.40 2.24 0.15 1.81 0.59
10-Year Corporate* 4.00 3.84 0.16 3.14 0.86
30-Year Corporate* 4.97 4.84 0.13 4.29 0.67
2-Year Municipal** 0.59 0.57 0.02 0.45 0.14
5-Year Municipal** 1.48 1.47 0.01 1.05 0.43
10-Year Municipal** 3.10 3.08 0.02 2.27 0.83
30-Year Municipal** 5.08 5.05 0.03 4.09 0.99
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*** $81.26 $81.13 $0.14 $82.36 -$1.09
CRB $292.49 $285.38 $7.11 $302.39 -$9.90
Gold $1,371.50 $1,312.30 $59.20 $1,617.10 -$245.60
Crude Oil $107.67 $105.97 $1.70 $95.60 $12.07
Unleaded Gasoline**** $2.97 $2.91 $0.06 $2.77 $0.20

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