Weekly Stock Market Update—October 4, 2013
By Steve Scranton, SVP, CFA
Chief Investment Officer

Stock Market Update

Uncertainty about how the future will unfold kept equity investors in a “watch and wait” mode this week, as political gamesmanship reached unprecedented levels in Washington D.C. Typical of the stock market, uncertainty translated into higher volatility and downward pressure on stock prices. Going into the beginning of the week, the market had already “priced in” (during last week’s sell-off) a possible partial government shutdown if Congress was not able to resolve its disagreement over the budget. At midnight on Monday, with the deadline at hand and no budget agreement reached, the government went into partial shutdown for the first time in 17 years. On Tuesday, this news came and went with little damage to the stock market, as investors speculated that the impasse would be short-lived and that the Democrats and Republicans would find a common ground on which to approve a budget. Congressional leaders and President Obama worked during the week to resolve the impasse, but no compromises were reached.

Anxiety and speculation mounted as the week went on that this budget battle could persist into mid-October and become entangled with the crucial discussions on the debt ceiling deadline. Investors are growing more concerned that Congress has become so polarized that, if it cannot work together to approve a budget, there is a much greater chance that the debt ceiling battle will go to the brink–or beyond, which could possibly lead to a default. In the past, the stock market has not been negatively impacted by government shutdowns. However, market volatility was much higher when there were concerns about the debt limit deadline. Between July 22, 2011 and October 3, 2011, the S&P 500 fell by 17.9% on concerns that the U.S. might not increase the debt ceiling before the deadline and could thus default on its debt.

Needless to say, news out of Washington remains high on the radar screen. While the political battle continues, an event normally of high importance to equity market participants is sneaking up. Earnings season will kick off next week with a few companies starting to release their third quarter results. Very little attention has been paid to this looming mountain of company information, as investors focus on the political drama in Washington and worry about the debt ceiling deadline. Earnings season seems to be sitting squarely in the back seat right now as the Washington “watch and wait” game drags on.

Current Week Month of October YTD
Dow Jones (INDU) -1.18% -0.34 17.23%
S&P 500 (SPX) -0.04% 0.56% 20.47%
Nasdaq (CCMP) 0.73% 0.99% 27.36%
MSCI EAFE (EAFE) -0.82% 0.14% 16.93%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
SOUTHERN CO/THE (SO) Citing poor weather conditions and low labor productivity, Mississippi Power has extended the completion of its Kemper coal gasification plant (Kemper IGCC) to later in 2014, beyond the inservice schedule of May 2014. As a result the company will not be eligible for $133 million in tax credits. Unchanged

Fixed Income Update

With a partial government shutdown and a looming debt limit breech on or around October 17th, the bond market seems to be thinking that something will be worked out and a default will be averted. The lack of economic data due to the partial government shutdown is causing bond investors to sit on the sidelines. As a result, it was a very quiet week with Treasury yields ranging from unchanged to increasing 4 basis points.

Looking back at the 3rd quarter, the Fixed Income markets bounced slightly from losses experienced in the first half of the year. The main impetus for the reversal was the Federal Reserve’s Open Market Committee (FOMC) decision to not cut back (taper) its asset purchase program. As a result of this decision, yields on interest rates declined in September. This accounted for the positive performance (+0.63%) of the Barclays Government / Credit (1-5) index for the quarter. The main beneficiary of the Fed’s decision not to taper were the intermediate maturities (3 years to 10 years) of the yield curve while the long end (20+ years) generally did the worse.

Breaking down the various Fixed Income sectors, the Treasury sector returned just 0.10%. The 3 – 5 year maturities led the way with positive quarterly performance of 0.69%s. The long end continued performing poorly at a -2.77%. Treasury Inflation Protected Securities (TIPS) did better. Similar to Treasuries, they were led by the intermediate maturities. But unlike nominal Treasury securities, TIPS had positive performance across the yield curve. Although TIPS performance was positive for the quarter (+0.70%), year to date performance is still solidly negative.

We had positive performance in the Investment-grade Corporate bond sector of 0.72% for the quarter. Intermediate maturities generally out-performed but the stand-out was the performance of Financial Institutions (+1.54%), surprisingly led by the long maturities. “AAA” rated companies did the worst while “A” rated companies did the best. Although Investment-grade returns were positive for the quarter, year to date returns remain negative.

Agency securities, due to their shorter maturity horizon, had marginal positive performance of 0.28% for the quarter.

In spite of huge mutual fund redemptions, Municipal bonds did surprisingly well. The outflows were offset by decreased supply and attractive yields that enticed taxable crossover investors (insurance companies and pension funds). Led by the intermediate maturities, Municipal bonds returned 0.56% for the quarter and are actually positive on the year.

October 4, 2013

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.03 0.04 -0.01 0.22 -0.19
Taxable MMF 0.01 0.02 -0.01 0.17 -0.16
2-Year Treasury 0.33 0.33 0.00 0.24 0.09
5-Year Treasury 1.41 1.40 0.01 0.63 0.78
10-Year Treasury 2.65 2.63 0.02 1.67 0.97
30-Year Treasury 3.72 3.69 0.04 2.89 0.83
5-Year Exp. Inflation 1.85 1.81 0.04 2.22 -0.37
2-Year Agency 0.37 0.37 0.00 0.32 0.04
5-Year Agency 1.70 1.72 -0.03 0.91 0.79
10-Year Agency 3.27 3.28 -0.01 2.24 1.03
2-Year Corporate* 0.80 0.80 0.00 0.71 0.09
5-Year Corporate* 2.24 2.27 -0.03 1.58 0.66
10-Year Corporate* 3.87 3.88 -0.01 2.94 0.94
30-Year Corporate* 4.91 4.88 0.03 4.21 0.70
2-Year Municipal** 0.52 0.51 0.01 0.45 0.07
5-Year Municipal** 1.50 1.49 0.01 0.93 0.57
10-Year Municipal** 2.90 2.93 -0.03 2.17 0.73
30-Year Municipal** 4.99 4.99 0.00 4.04 0.95
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*** $80.13 $80.29 -$0.16 $79.35 $0.78
CRB $286.45 $286.98 -$0.53 $310.45 -$24.00
Gold $1,309.60 $1,338.40 -$28.80 $1,796.50 -$486.90
Crude Oil $103.63 $102.87 -$0.76 $91.71 $11.92
Unleaded Gasoline**** $2.61 $2.66 -$0.05 $2.55 $0.06

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