Weekly Stock Market Update—October 18, 2013
By Steve Scranton, SVP, CFA
Chief Investment Officer

Stock Market Update

If you strictly watched the action in the equities markets this week, you would never have known that there was chaos in Congress. Throughout all of the noise and drama of Congress, equity investors appeared to take two views of the government shutdown and debt ceiling issue:
1) Been there, done that; Congress will ultimately resolve this.
2) Chaos in Congress means no tapering of Quantitative Easing.

The S&P 500 only suffered one negative day during the week (Tuesday) and ultimately finished the week at an all-time high. The strongest performing equity index was the NASDAQ Composite (+3.23%), followed by the S&P 500 (+2.44%), with the Dow Jones Industrial finishing up 1.12%.

As discussed in last week’s commentary, earnings season has not been much of a factor in October. Earnings season has been a mixed bag so far with no clear trend. Now that the government shutdown and debt ceiling have been temporarily resolved, earnings season may now come into focus. Next week will have a heavy slate of companies releasing their earnings results so it will be interesting to see if fundamentals matter as these results come out.

The reality is that fundamentals have not been the driving force behind the equity markets’ fabulous run this year, so earnings season may not play the role that it has in previous years. World central bank intervention in the investment markets has been the strongest driving force this year. As long as world central banks are suppressing interest rates, money continues to flow to equities. This year’s equity growth has resulted in an expansion in the P/E ratio rather than a significant expansion in actual earnings. What remains to be seen is whether the increase in wealth for equity investors translates into increased spending, increased economic growth and ultimately increased earnings growth.

Current Week Month of October YTD
Dow Jones (INDU) 1.12% 1.91 19.88%
S&P 500 (SPX) 2.44% 3.85% 24.41%
Nasdaq (CCMP) 3.23% 3.83% 30.94%
MSCI EAFE (EAFE) 1.98% 2.55% 19.74%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
APPLE INC (AAPL) Announced that Angela Ahrendts, current CEO of Burberry, will join Apple in the spring of 2014 as Senior Vice President of Retail and Online Stores. Unchanged
CSX CORP (CSX) CSX reported third quarter earnings of $0.46/share, vs. estimates of $0.43/share, and compared to $0.44 per share last year. Unchanged
COMERICA INC (CMA) CMA announced 3Q 2013 earnings of $0.78 per share, up from $0.61/share last year, and above analysts' estimates of $0.71/share. Unchanged
PNC FINANCIAL SERVICES GROUP (PNC) Third quarter earnings of $1.79 per share exceeded the consensus estimate of $1.62/share, and compared to earnings of $1.64/share a year ago. Unchanged
W.W. GRAINGER (GWW) GWW reported 3Q earnings of $2.95 per share, below Wall Streets forecast of $3.03/share. Revenue rose 5% y/y to $2.40 billion, modestly short of the consensus estimate of $2.42 billion. Unchanged
INTL BUSINESS MACHINES CORP (IBM) Announced third quarter operating earnings of $3.99/share, $0.03 above the Street estimate. Quarterly revenue declined to $23.72 billion, down 4% y/y, and below analysts' estimates of $24.75 billion. Unchanged
JPMORGAN CHASE & CO (JPM) JPM reached an agreement with the Commodity Futures Trading Commission to pay $100 million to settle charges related to the s London Whale trading scandal. Unchanged
GOLDMAN SACHS GROUP INC (GS) GS reported 3Q earnings of $2.88 per share, $0.45 above the consensus forecast of $2.43. Revenue declined 19% y/y to $6.7 billion, below analysts' estimates of $7.4 billion. The company raised the quarterly cash dividend to $0.55 per share, from $0.50/share. Unchanged
PHILIP MORRIS INTERNATIONAL (PM) PM reported 3Q 2013 earnings of $1.44 per share, $0.01 better than the consensus estimate. Unchanged
UNITEDHEALTH GROUP INC (UNH) Announced third quarter earnings of $1.53 per share, up from $1.50 last year, and in-line with the Street estimate. Revenue increased 12% y/y to $30.6 billion. Unchanged
VERIZON COMMUNICATIONS (VZ) Verizon reported third quarter operating earnings of $0.77 per share, up 20% y/y, and compared to Wall Street estimates of $0.74/share. Revenue rose 4.4% to $30.3 billion, better than analysts' estimates of $30.2 billion. Unchanged

Fixed Income Update

The fixed income markets saw quite a bit of volatility this week but ultimately benefited from the chaos in Congress. In a bit of convoluted logic, money flowed into intermediate and longer-term Treasuries (as a safe haven) but avoided the very short-term maturities. The logic appeared to be that investors did not want to run the risk of owning a short-term Treasury and then not getting their money on time due to Congressional brinkmanship. At the same time, investors remained confident that the debt ceiling would eventually get raised, so owning an intermediate or longer-term Treasury was still okay. As a result Treasury bills maturing in October spiked to .54% when the debt ceiling was in doubt and then dropped back to .15% by Friday once the debt ceiling was temporarily extended. In contrast the 10 year Treasury started the week at 2.69% and then rose slightly to 2.74% before declining to 2.59% at the end of the week.

Now that the debt ceiling issue has been temporarily resolved, focus is returning to what the Federal Reserve may do regarding Quantitative Easing. The fixed income market appears to be anticipating a “no-taper” decision from the Federal Reserve. Comments from several Federal Reserve governors indicated concern over the negative impact to the economy due to the government shutdown. One of the Federal Reserve governors also indicated that since there has been virtually no economic data released during the shutdown, it would not make sense to begin tapering at their October meeting. The prevailing view in the fixed income markets is that December is the soonest that the Federal Reserve will begin tapering.

Company Spotlight

Reported quarterly earnings Buy / Buy
Baa2 */A-/A
Reported quarterly earnings Hold / Hold
Reported quarterly earnings Hold / Hold
Reported quarterly earnings Buy / Buy
Reported quarterly earnings Buy / Buy
Reported quarterly earnings Buy / Buy
Aa2/AA/#N/A N/A
Reported quarterly earnings Buy / Buy
A3 *-/A-/A
Reported quarterly earnings Hold / Hold
Baa1 *-/A-/A
Reported quarterly earnings Hold / Hold
Reported quarterly earnings Buy / Buy
Aa3/AA+/#N/A N/A
Reported quarterly earnings Buy / Buy

October 18, 2013

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.03 0.02 0.01 0.20 -0.17
Taxable MMF 0.03 0.02 0.01 0.16 -0.13
2-Year Treasury 0.31 0.35 -0.04 0.30 0.01
5-Year Treasury 1.34 1.42 -0.08 0.79 0.55
10-Year Treasury 2.59 2.69 -0.10 1.84 0.75
30-Year Treasury 3.65 3.75 -0.10 3.02 0.63
5-Year Exp. Inflation 1.84 1.85 -0.01 2.18 -0.35
2-Year Agency 0.39 0.43 -0.03 0.35 0.04
5-Year Agency 1.69 1.78 -0.09 1.05 0.65
10-Year Agency 3.28 3.37 -0.09 2.38 0.90
2-Year Corporate* 0.78 0.82 -0.04 0.63 0.15
5-Year Corporate* 2.21 2.30 -0.09 1.61 0.59
10-Year Corporate* 3.85 3.95 -0.10 2.96 0.89
30-Year Corporate* 4.83 4.93 -0.10 4.19 0.64
2-Year Municipal** 0.48 0.51 -0.03 0.45 0.03
5-Year Municipal** 1.44 1.47 -0.03 0.90 0.54
10-Year Municipal** 2.95 2.90 0.05 2.15 0.80
30-Year Municipal** 5.05 5.01 0.04 4.05 1.00
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*** $79.64 $80.36 -$0.72 $79.37 $0.27
CRB $286.92 $286.61 $0.31 $308.75 -$21.83
Gold $1,315.30 $1,268.20 $47.10 $1,744.70 -$429.40
Crude Oil $100.82 $102.02 -$1.20 $92.10 $8.72
Unleaded Gasoline**** $2.68 $2.67 $0.01 $2.57 $0.10

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