Weekly Stock Market Update—September 20, 2013
By Steve Scranton, SVP, CFA
Chief Investment Officer

Stock Market Update

Leading into September, a number of market pundits had stressed that September is historically one of the most difficult months of the year and that caution was warranted. However, this year’s September has thus far become an example of the phrase, “past performance is not indicative of future results.” The stock market has been exceptionally strong thus far in September, with the Dow Jones Industrial Average (Dow) and the S&P 500 up 4.4% and 4.8%, respectively. This week’s performance contributed nicely to that rally, with the Dow gaining 0.5% and the S&P 500 rising by 1.3%.

Much of this week’s gain occurred as new events and information helped resolve uncertainty about a couple of questions:

  • Who will be appointed to lead the Federal Reserve (Fed) after Chairman Bernanke’s term expires in January? In a surprise decision, former Treasury Secretary Lawrence Summers withdrew as a candidate. Vice Chair Janet Yellen is now considered the frontrunner to replace Chairman Bernanke. The news led equity investors to speculate that monetary policy could remain accommodative longer if Vice Chair Yellen is appointed.
  • Will the Fed begin to taper its economic stimulus program? This was the big focus–and what equity investors had been awaiting for the past few months. After concluding its monetary policy meeting, the Fed made a surprise announcement that the pace of its economic stimulus program would remain unchanged for the time being. Essentially, the Fed took a ‘wait and see’ stance on how the economy and employment fare before deciding on when to begin the tapering process. Stocks rallied sharply on this news.

So ends the third consecutive week of gains for stocks. However, stocks faded on Friday afternoon as the next subject of concern moved to the fore–the looming budget fight in Washington. In order to keep the government running, Congress must pass a short-term spending bill before the fiscal year starts October 1st. Concern about this issue increased after the House voted Friday to include a one year delay in the impending Affordable Care Act as part of its package on increasing the debt limit. This sets the stage for a confrontation between Democrats and Republicans next week. Political maneuvering on budget negotiations will kick into high gear ahead of the September 30th budgedt deadline—and has the potential to test the stock market’s robust September gains.

Current Week Month of September YTD
Dow Jones (INDU) 0.50% 4.44 20.13%
S&P 500 (SPX) 1.32% 4.83% 21.76%
Nasdaq (CCMP) 1.41% 5.19% 26.18%
MSCI EAFE (EAFE) 3.25% 8.78% 18.25%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
MICROSOFT CORP (MSFT) MSFT increased the quarterly dividend by 22%, to $0.28 per share (to yield ~3.4%), and authorized a new share buyback program, which will replace the current program set to expire on Sept. 30. Unchanged
ORACLE CORP (ORCL) Reported fiscal 1Q operating earnings of $0.59 per share, above analysts' estimates of $0.56/share. Revenue rose 2% to $8.37 billion, short of the consensus estimate of $8.48 billion. Unchanged
JPMORGAN CHASE & CO (JPM) JPM announced it has agreed to a $920 million settlement with regulators regarding the 2012 CIO trading incident. Unchanged

Fixed Income Update

This week was thought to be the beginning of the end for the Federal Open Market Committee’s (FOMC) quantitative asset purchase program. Expectations were rampant, and already priced into the market, that the Fed would announce that they would begin to taper from the current $85 billion of asset purchases to possibly $75 billion of purchases. The Federal Reserve unexpectedly refrained from reducing the $85 billion pace of monthly bond buying, saying it needs to see more evidence of improvement in the economy. “The Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.” While “downside risks” to the outlook have diminished, “the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement.” The next FOMC meetings are October 29-30 and December 17-18.

As the market was expecting the Fed to begin tapering its asset purchases, bond yields adjusted to the change. Yields moved lower, especially in the 5-year to 7- year maturity sector. This area took the brunt of the damage when yields began to rise and thus it is natural they would benefit on such news.

Treasury inflation protected securities (TIPS) also reacted strongly to the announcement. Bernanke mentioned that the FOMC discussed defining an inflation floor that in the future would reinforce the forward rate guidance, implying that the Fed would refrain from raising rates if inflation stays below the 2% target. While the Fed participants' inflation forecasts did not appreciably change, the message was that the Fed wants inflation back toward its target and would consider holding back a tightening in policy until that gap is narrowed.

For the week, yields of U.S. Treasury securities decreased 7 to 22 basis points.

Company Spotlight

ORACLE CORP (ORCL)
A1/A+/A+
Reported quarterly earnings Buy / Buy

September 20, 2013

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.04 0.04 0.00 0.22 -0.18
Taxable MMF 0.01 0.01 0.00 0.18 -0.17
2-Year Treasury 0.33 0.43 -0.10 0.26 0.07
5-Year Treasury 1.47 1.69 -0.22 0.69 0.78
10-Year Treasury 2.73 2.89 -0.16 1.77 0.97
30-Year Treasury 3.76 3.84 -0.07 2.95 0.82
5-Year Exp. Inflation 1.90 1.80 0.10 2.18 -0.29
2-Year Agency 0.45 0.53 -0.08 0.32 0.12
5-Year Agency 1.79 1.98 -0.18 0.96 0.83
10-Year Agency 3.41 3.53 -0.12 2.32 1.09
2-Year Corporate* 0.85 0.93 -0.08 0.69 0.16
5-Year Corporate* 2.42 2.60 -0.18 1.60 0.82
10-Year Corporate* 4.05 4.16 -0.11 2.99 1.05
30-Year Corporate* 5.01 5.02 -0.01 4.21 0.80
2-Year Municipal** 0.57 0.59 -0.02 0.43 0.14
5-Year Municipal** 1.61 1.70 -0.09 1.06 0.55
10-Year Municipal** 3.11 3.28 -0.17 2.36 0.75
30-Year Municipal** 5.10 5.22 -0.12 4.12 0.98
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*** $80.44 $81.45 -$1.01 $79.41 $1.03
CRB $287.44 $291.02 -$3.58 $306.93 -$19.49
Gold $1,332.60 $1,308.40 $24.20 $1,767.80 -$435.20
Crude Oil $104.67 $108.21 -$3.54 $91.87 $12.80
Unleaded Gasoline**** $2.69 $2.77 -$0.08 $2.52 $0.16

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