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Senate Panel Backs Obama; Jobs Report Falls Flat

Market Digest – Week Ending 8/23

Stocks regained most of last week’s losses while investors attempted to understand the implications of potential military action in Syria. The week ended with threats from all sides but little clarity on what may happen. Economic news was mixed. US manufacturing and construction activity exceeded estimates while Friday’s jobs report disappointed. The majority of the evidence seemed to be consistent with the Fed beginning to slow bond purchases as soon as this month. Bonds fell.

Weekly Returns:
S&P 500: 1,655 (+1.4%)
FTSE All-World ex-US: (+3.3%)
US 10 Year Treasury Yield: 2.94% (+0.16%)
Gold: $1,390 (-0.2%)
USD/EUR: $1.318 (-0.3%)

Major Events:
• Tuesday – Microsoft bid $7 billion for Nokia’s phone unit.
• Tuesday – The August ISM manufacturing index rose to the highest level since June, 2011.
• Wednesday – A key Senate panel on Wednesday backed President Obama’s request to strike Syria, including key language that a goal will be to “change momentum on the battlefield”.
• Wednesday – Russian President Putin said U.S. Secretary of State John Kerry lied about denying the extent to which al Qaeda was fighting with Syrian opposition.
• Friday – Putin said Russia will assist Syria if US strikes are commenced.
• Friday – Employers added 169,000 jobs in August, below expectations. The report potentially complicates the Fed’s plans to start reducing stimulus. Unemployment dropped to 7.3% due to a high number of people exiting the labor force.
• Friday – US officials said they intercepted an order from Iran to militants in Iraq to attack the US Embassy and other American interests in Baghdad in the event of a strike on Syria.

Our Take:
Despite saber rattling from the US, Russia, Syria, Iran, France and others, the stock market managed solid gains. Political decisions are impossible to predict. In the Middle East all we know for sure is there will be more conflict. But rising global equity prices are a good indication that the odds of the Syrian civil conflict spreading meaningfully are low.

Also notable was the fact that emerging markets were the largest gainers and international stocks overall bested the US. We haven’t seen much of this so far in 2013, but there are increasing signs the European recovery is starting to gain traction. Southern Europe was helped by strong tourist traffic in part due to turmoil in Egypt and the broader Middle East. One week doesn’t mean much, but if Europe can sustain momentum, overseas stocks are ripe for impressive gains.

In company specific news, Microsoft is set to acquire Nokia’s phone business for $7 billion. This is likely CEO Steve Ballmer’s final big move and it sets the future course of Microsoft by forcing it to be as devoted to hardware as it is to software. The media is quick to discount their prospects, but we don’t. Nokia missed the boat on smart phones but still has a decent brand name and good distribution systems in place. Microsoft has talent and deep pockets. The distinction between computer and mobile is increasingly cloudy and the competition is increasingly fierce. Among corporations, there will be winners and losers. Consumers will be the big winners.

Disclosure: We own Microsoft shares in many client accounts.

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