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

Stock Market Update

When and by how much? Those are the questions that have been consuming the equity market’s attention for some time now. In late May, Federal Reserve (Fed) Chairman Ben Bernanke hinted about the possibility of starting to taper the Fed’s economic stimulus (quantitative easing) program but gave no specifics about how large the program reduction would be or when it would happen. As we have noted several times over the years, equity investors absolutely detest uncertainty. Given the large part that the Fed’s stimulus program has played in this years’ impressive market rally, the search was on for clues that would answer these questions. Well, this week the search ended and the questions were finally answered.

The pivotal event of the week was the Fed’s last policy-setting meeting of the year. (It was also the last meeting in which Fed Chairman Bernanke would preside before the new chairman is appointed.) Stocks moved up nicely on Monday as investors reacted positively to some upbeat economic data–which seemed to bolster optimism about the health of the economy. But on Tuesday, stocks drifted modestly lower as investors turned cautious leading up to the event.

Upon conclusion of its meeting Wednesday, the Fed announced that starting in January it will taper the pace of its stimulus program asset purchases by $10 billion per month (to $75 billion). It expects to enact further tapering at future meetings and could conclude the stimulus program in the second half of 2014. It also commented that it expects to keep the Fed Funds rate near zero longer than previously promised (“well past the time” that unemployment falls below 6.5% and not before 2015). Finally, the Fed also noted that its assessment of the economic outlook was somewhat more upbeat and indicated that future tapering would come in measured steps–and would remain contingent on its outlook for the economy, labor market and inflation. This news put to rest the uncertainty. The equity market also interpreted the comments and actions as a vote of confidence in the economy’s durability. The Dow and S&P 500 staged an explosive rally in response to the news, rising 1.8% and 1.6%, respectively. Stocks continued to move up over the remainder of the week, but at a slower pace as the market paused to digest the big gains from Wednesday.

Wednesday’s market behavior was a powerful demonstration of equity investors’ need for certainty. Looking into next year, the market will continue to look for clues on the underlying health of the economy and to what extent it will influence the Fed’s decisions on its stimulus program. As the new year rolls in, we expect that investors will continure to examine economic data but that the focus will shift toward corporate America as it gets set to start reporting fourth quarter earnings results in mid-January.

Current Week Month of December YTD
Dow Jones (INDU) 2.97% 0.98% 26.87%
S&P 500 (SPX) 2.45% 0.82% 30.17%
Nasdaq (CCMP) 2.60% 1.15% 37.69%
MSCI EAFE (EAFE) 2.60% 1.15% 19.62%
Russell Mid Cap (RMC) 2.46% 1.28% 32.60%
Rusell 2000 (RTY) 3.58% 0.39% 36.67%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
ORACLLE CORP (ORCL) Reported fiscal 2Q operating earnings of $0.69 per share, $0.02 above analysts' estimates. Revenue rose 2% to $9.3 billion, beating the consensus estimate of $9.2 billion. Unchanged

Fixed Income Update

All eyes were on the FOMC meeting this week as investors anticipated an announcement of a reduction in the Fed’s monthly bond purchase program. The meeting concluded Wednesday with the committee deciding to reduce the size of both Mortgage-backed securities and US Treasury purchases by $5 billion each per month, reducing the pace of total bond buying from $85 billion to $75 billion.

The Fed cited a moderate pace of economic growth, and a declining, but still elevated unemployment rate in their statement. They also felt that their actions, known as quantitative easing (QE), were more effective than economic data may make it appear. While the committee anticipates further reductions they reiterated that those reductions remain data dependent by stating: “asset purchases are not on a preset course and the Committee’s decisions about their pace will remain contingent on the outlook for the labor market and inflation…” Chairman Ben Bernanke also indicated QE is likely to last until late 2014 versus some expectations that it would end closer to mid-2014.

The Fed also issued new forward guidance in its post-FOMC statement. The Committee promised to keep the fed funds rate low “well past the time the unemployment rate declines below 6½ percent”, and emphasized their target of 2.0% inflation. The fed funds rate has been a range of 0 to 0.25% since 2008 while inflation as measured by CPI was 1.3% for the 12 months ended in November.

This was the last FOMC meeting with Bernanke scheduled to be at the helm. When asked about the transition of leadership from himself to Janet Yellen, Bernanke responded that he thinks the transition will go smoothly as they generally agree on “all the big things”. A final confirmation hearing for Yellen’s appointment originally scheduled to be held this weekend was postponed by the Senate until early January. All expectations are that Yellen will chair the FOMC’s meeting scheduled for the 27th & 28th of January.

For the week Treasury yields ranged from down 5 to up 14 basis points.

Company Spotlight

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

December 20, 2013

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.01 0.01 0.00 0.10 -0.09
Taxable MMF 0.01 0.01 0.00 0.14 -0.13
2-Year Treasury 0.37 0.33 0.05 0.27 0.10
5-Year Treasury 1.67 1.53 0.14 0.78 0.90
10-Year Treasury 2.89 2.87 0.02 1.80 1.09
30-Year Treasury 3.82 3.87 -0.05 2.98 0.84
5-Year Exp. Inflation 1.77 1.75 0.02 2.10 -0.33
2-Year Agency 0.42 0.42 0.00 0.32 0.11
5-Year Agency 1.92 1.85 0.06 1.00 0.91
10-Year Agency 3.58 3.53 0.05 2.28 1.30
2-Year Corporate* 0.76 0.78 -0.01 0.69 0.07
5-Year Corporate* 2.41 2.38 0.03 1.67 0.74
10-Year Corporate* 4.14 4.11 0.03 2.98 1.15
30-Year Corporate* 4.96 4.98 -0.01 4.22 0.74
2-Year Municipal** 0.46 0.49 -0.03 0.51 -0.05
5-Year Municipal** 1.47 1.46 0.01 1.07 0.40
10-Year Municipal** 2.92 2.94 -0.02 2.18 0.74
30-Year Municipal** 5.01 5.04 -0.03 4.01 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*** $80.52 $80.21 $0.31 $79.26 $1.26
CRB $283.13 $279.67 $3.46 $294.49 -$11.36
Gold $1,200.90 $1,234.60 -$33.70 $1,645.90 -$445.00
Crude Oil $99.12 $96.60 $2.52 $90.13 $8.99
Unleaded Gasoline**** $2.79 $2.63 $0.16 $2.52 $0.26

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