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Markets Remain Volatile on EM and Mixed Earnings

Market Digest – Week Ending 1/31

January was a dose of reality for stock investors lulled into complacency by 2013’s persistent march upward. The S&P 500 fell 0.4% for the week, and 3.6% for the month. This week, headlines focused on a potential credit crisis in emerging markets, and emerging currencies declined relative to the dollar as the Fed took its second step to “taper” bond purchases. Earnings releases were mixed. Apple and Amazon missed expectations, but Facebook and Google beat.

Weekly Returns:

S&P 500: 1,783 (-0.4%)
FTSE All-World ex-US: (-1.6%)
US 10 Year Treasury Yield: 2.65% (-0.07%)
Gold: $1,244 (-2.0%)
USD/EUR: $1.349 (-1.4%)

Major Events:   

  • Monday – Samsung and Google reached an agreement to license each other’s patents as they attempt to compete with Apple.
  • Monday – Sales of new single-family homes fell more than expected in December, but lean inventories and steady price gains suggested the housing market remains strong.
  • Monday – Apple reported that it sold fewer iPhones than expected in Q4. Shares declined.
  • Tuesday – President Obama delivered his State of the Union address. It featured little in the way of policy initiatives, but proposed a new kind of retirement savings account for those not currently participating in 401k accounts.
  • Wednesday – The Fed said it would cut bond purchases to $65 billion a month, from $75 billion, and suggested it would continue $10 billion incremental reductions in the months ahead.
  • Wednesday – Facebook announced higher than expected earnings growth and said that mobile advertising now accounts for over half of advertising revenues. Shares rose.
  • Thursday – Google announced it sold its Motorola unit to Lenovo, but will retain many of the patents originally acquired in the deal.
  • Thursday – Amazon posted 20% revenue growth, but earnings fell short of estimates. Shares fell.
  • Friday – Rumors circulated that internal executive Satya Nadella has emerged as the leading candidate to be Microsoft’s next CEO.
  • Friday – Consumer prices in the European Union rose by just 0.7% in the 12 months to January, raising concerns of disinflation and low growth.

Our Take:

This week featured a series of high profile earnings results – some good, some bad. S&P 500 earnings for Q4 are now expected to grow by 6.6% from last year. Considering profits are declining at most major oil companies, this is pretty impressive. And it represents the true beauty of owning a diversified stock portfolio. Whatever may be happening with emerging market currencies, Fed tapering, or the government, company earnings tend to grow in a compound fashion, over time.

Valuation multiples rise and fall, but the true value of the stock market is underlying earnings and the ability to pay dividends. A 6.6% growth rate is lower than the historical stock return averages, but there is nothing wrong with it.

Among companies growing faster, Chipotle Mexican Grill managed another outstanding quarter. Net income rose 30%, sending the stock up 12% on Friday. This equates to a market cap gain of about $1.8 billion. That’s 250 million burritos – not bad for one day. I struggle to justify Chipotle’s valuation, but it is great to see another example of a well-managed company adding value for its shareholders and customers.

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