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S&P 500 Ends Week on a High Note; Treasuries Fall

Market Digest – Week Ending 1/25

The S&P 500 increased every day this week, pushing its winning streak to eight days. Volatility remained low, so the total gain was modest. Apple reported a record profit but provided a disappointing outlook and shares fell by 12% for the week. Outside of Apple, earnings are generally exceeding expectations and are pushing shares higher in the absence of any other major news concerns. Notable strong results this week included Proctor & Gamble, Netflix, Halliburton and Starbucks. Treasuries fell after data showed European banks plan to pay back more of the ECB’s three year loans than expected.

Weekly Returns:

S&P 500: 1,503 (+1.1%)

MSCI ACWI ex-US: (+0.8%)

US 10 Year Treasury Yield: 1.94% (+0.10%)

Gold: $1,659 (-1.5%)

USD/EUR: $1.346 (+1.1%)

Major Events:

  • Tuesday – Israeli Prime Minister Benjamin Netanyahu was reelected, but saw his support base in the Knesset weakened as more moderate parties gained.
  • Tuesday – Microsoft was rumored to be in talks with Silver Lake Partners regarding a potential private equity purchase of Dell Computer.
  • Wednesday – The US House of Representatives agreed on a bill to temporarily extend the debt ceiling, most likely until May.
  • Wednesday – Apple reported earnings above estimates but fell short of revenue predictions and issued disappointing guidance. Shares fell.
  • Thursday – Chinese manufacturing grew at the fastest pace in two years.
  • Thursday – A Euro-area purchasing manager’s index rose more than expected.
  • Thursday – The US Conference Board’s index of leading indicators rose 0.5% in December.
  • Friday – German business index for January rose more than forecast.

 Our Take:

Other than Apple, it was a feel-good week. It has been rare in the last year to have positive news out of the US, Europe and China at the same time. Scary macro issues dominated the headlines in 2012, but corporate earnings are stealing the spotlight so far this year, and in a good way. The S&P 500 crossed 1,500 for the first time since December of 2007, and is now just a few percent from its all-time high. On a total return basis, the index has already provided investors with a positive return since the previous peak. As we mentioned last week, all of this calm has bred complacency, and we wouldn’t be surprised to see volatility return soon.

A silver lining in Apple’s decline is that the overall market ignored it. At the peak Apple was about 5% of the S&P 500, representing a meaningful overhang risk on the whole index and highlighting a problem with capitalization weighted indexes in general. This specific risk has been reduced to a large degree, and at current valuations index investors should now feel significantly better about Apple’s future impact on their investment.

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