Weekly Stock Market Update—August 30, 2013
By Steve Scranton, SVP, CFA
Chief Investment Officer

Stock Market Update

The combination of continued “Fed watch” and a rise in concern about the Syrian crisis brought a difficult week of performance to the equity markets, in what is typically a quiet last week of summer. Stocks have still not experienced an official pullback (defined as a 5%-9.9% market decline), but market behavior has certainly been frustrating. This week got off to a quiet start on Monday morning. However, stocks took a notable turn to the downside in the afternoon and moved sharply lower on Tuesday, as fear rose sharply regarding a possible U.S.-led military strike against Syria in response to the horrific events that have reportedly occurred. Late Monday, U.S. Secretary of State John Kerry said in a speech that evidence of a massive deadly chemical attack last week was “undeniable” and that all nations must stand up for accountability on the use of chemical weapons in Syria. It was also reported that missile strikes could start as early as Thursday. Escalation in a geopolitical event has not been factored into stock prices, so this news caused a sharp downside market response.

The market essentially treaded water in the second half of the week, as investors awaited decisions by the U.S. and its allies about how to respond to the situation in Syria. With uncertainty high and the long weekend looming, investor sentiment remained guarded. Lack of clarity over when—and at what pace—the Fed may taper its economic stimulus program also continued to dampen investor sentiment. Mixed economic news did not provide much insight on this question.

All in all, during the summer (5/31-8/30), the S&P 500 has essentially marked time, rising by a mere 0.7%. Nevertheless, gains remain significant, with the S&P 500 up a strong 16% through August 30th.

As we enter September, equity investors remain on pins and needles about the Fed’s future plans and are hoping for increased clarity with it meets in the coming month. In the meantime, the possibility of an attack on Syria remains priced into the equity markets. Equity investors will be watching closely for developments on these two situations.

Current Week Month of August YTD
Dow Jones (INDU) -1.29% -4.11% 15.02%
S&P 500 (SPX) -1.79% -2.90% 16.15%
Nasdaq (CCMP) -1.83% -0.82% 19.95%
MSCI EAFE (EAFE) -2.39% -0.43% 9.63%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
W.W. GRAINGER (GWW) GWW announced that it acquired E&R Industrial Sales, Inc., a distributor of metalworking, production supplies, and MRO materials. The deal is exepected to be accretive to earnings in 2014. Financial terms were not disclosed. Unchanged
VERIZON COMMUNICATIONS (VZ) Vodafone Group PLC (VOD) announced it was in talks with Verizon to sell its 45% interest in Verizon Wireless. Unchanged

Fixed Income Update

The bond market experienced a flight to safety early this week as western powers, namely the U.S. and the U.K., edged very close to taking military action against Syria. The Syrian government’s alleged use of chemical weapons on its citizens was considered the red line that if crossed would provoke the U.S. and U.K. to take military action. As the likelihood that something would be done increased, investors began to worry what the consequences would be and thus sought the refuge of U.S. Treasury securities.

Tensions eased somewhat later in the week as the UN called for more time to allow its weapons inspectors to investigate and the U.K. Parliament voted against a strike. The situation is still very tenuous as anything could happen over the long weekend.

Absent the situation in Syria, Treasury yields are still biased to the higher side as worries of the Fed tapering its asset purchases remain high.

A by-product of the Fed’s tapering expectation has been the negative effect on emerging markets. Emerging markets saw increased inflows due to quantitative easing as investors hunted for higher yield. They are now experiencing capital outflows leading to volatility in their foreign exchange markets. The outflows are causing their interest rates to move higher and their currencies to weaken. Also, emerging market countries had been big buyers of U.S. debt and now they are not.

Another by-product of the Fed’s tapering expectation has been the perception that interest rate risk is currently much greater than credit risk. This is evident in the corporate bond market. The highest rated issuers (AAA credit) are underperforming the lower rated issuers. The highest rated issuers have been great benefactors of low interest rates as they have been able to borrow at extremely low rates while lower quality issuers did not have that luxury. As interest rates have increased, so has the cost of capital for the higher rated issuers relative to the lower credits.

For the week, yields of U.S. Treasury securities ranged from unchanged to decreasing 11 basis points.

August 30, 2013

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.09 0.07 0.02 0.21 -0.12
Taxable MMF 0.02 0.02 0.00 0.18 -0.16
2-Year Treasury 0.38 0.38 0.00 0.26 0.13
5-Year Treasury 1.60 1.62 -0.02 0.66 0.94
10-Year Treasury 2.75 2.82 -0.06 1.62 1.13
30-Year Treasury 3.68 3.79 -0.11 2.75 0.93
5-Year Exp. Inflation 1.79 1.82 -0.04 1.92 -0.14
2-Year Agency 0.48 0.48 0.00 0.33 0.15
5-Year Agency 1.87 1.91 -0.04 0.94 0.93
10-Year Agency 3.40 3.46 -0.06 2.22 1.19
2-Year Corporate* 0.88 0.86 0.01 0.76 0.12
5-Year Corporate* 2.50 2.53 -0.03 1.65 0.86
10-Year Corporate* 4.03 4.08 -0.05 2.92 1.11
30-Year Corporate* 4.90 4.97 -0.07 4.10 0.80
2-Year Municipal** 0.57 0.59 -0.02 0.45 0.12
5-Year Municipal** 1.63 1.59 0.04 1.01 0.62
10-Year Municipal** 3.28 3.25 0.03 2.24 1.04
30-Year Municipal** 5.22 5.21 0.01 4.09 1.13
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*** $82.08 $81.36 $0.71 $81.69 $0.38
CRB $291.17 $290.79 $0.38 $306.51 -$15.34
Gold $1,395.10 $1,395.60 -$0.50 $1,654.80 -$259.70
Crude Oil $107.56 $106.42 $1.14 $94.62 $12.94
Unleaded Gasoline**** $2.99 $3.01 -$0.02 $2.74 $0.25

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