August market review

September 1, 2013

Shortly after the end of each month, our CIO provides highlights of the market and our funds’ performance. Following is a summarized review of August  —

 Markets

  • US equity indices were down in August, giving up some of the gains from the first seven months of 2013.  The S&P 500 was down 2.90% for the month, but up 16.15% YTD. The Russell 2000 underperformed the S&P in August, down 3.18%, but still up 20.03% YTD.
  • The Developed International equity index, MSCI EAFE, outperformed the S&P again in August, down 1.32%, and is up 8.15% YTD, but still underperforming the S&P 500 by 8.00% for the year. The reversal in fortunes for Europe during the summer months is a result of perception of more attractive valuations, a sense that European economies have found a bottom and the selloff in the US.
  • Emerging markets were down 1.72% for August, and down -10.19% YTD.
  • The Japanese Nikkei 225 was also down -2.04%, for the month, and up 28.80% YTD. This performance, as previously mentioned, has been driven by the Bank of Japan devaluing the Yen, which is down over 11% through the end of July.
  • The 10-year and 30-year US Treasuries had increases in yields in August. The 10-year up was 21bps to finish July at 2.79% and the 30-year was up 6bps to 3.70%. The Federal Reserve again left the overnight lending rate unchanged at 0-0.25%.
  • Corporate bonds were down in the month of August. The Barclays Aggregate Index was down 0.51% for August and -2.81% YTD. The Credit Suisse Leveraged Loans Index (bank loans) was virtually flat for August, up 0.04%, but has had solid performance and is up 3.9% YTD.
  • Volatility in domestic equity markets has remained muted but picked up in late August. Concerns about potential military action in Syria saw volatility increase. However, even with that brief rise, the most common measure of volatility in the US markets, the VIX, remains at all-time lows.

Economic and Geopolitical Headlines

  • The second half of 2013 has seen a pick-up in ISM PMI; this is a proxy for manufacturing, and therefore economic health. In the US, August’s number was 55.7, up from 55.4 in July. A reading above 50 is considered economic expansion.
  • Unemployment ticked down again in August to 7.3%, the lowest since December 2008. There is still much debate, however, about how much of this improvement is being driven by part-time jobs and a continued decline in the participation rate as discouraged unemployed workers stop looking for work.
  • Fed Chairman Bernanke made sure to keep on message that rates will stay low and bond buying is not seen to be slowing in the near future. Speculation continues over who will replace Bernanke as Fed Chair with reports coming that President Obama wants Larry Summers — but many Senate Democrats want Janet Yellen.
  • Many market participants continue to watch the unemployment rate and other economic indicators, as the closer the unemployment rate gets to the Fed’s stated healthy level (somewhere around 6.5% depending on other indicators), the more likely it is that fiscal stimulus will be slowed. The market seems to believe that the Fed will start to slow its fiscal stimulus some time during 2H13. The Fed meets the second week of September and many are expecting Chairman Bernanke to clarify their plans after that meeting.
  • Domestic growth, as measured by GDP growth, for Q213 was revised up to 2.5% from 1.7%. This positive GDP revision was a pleasant surprise; however, the market is interpreting economic gains as portending a reduction in Quantitative Easing from the Fed, so market reaction was not all positive. In August, the housing market in the US started to show signs of stress from higher mortgage rates. New home sales were down 13.4%; however, existing sales, housing starts and housing permits were up 6.1%, 5.9% and 2.7%, respectively.
  • Emerging markets continue to show signs of having found a bottom in regards to expectations of growth versus actual growth. China data in August was mildly encouraging. EM markets have slowed considerably and there are growth concerns throughout; however, investors’ expectations have been considerably lowered. There are still major concerns about the health of other large EM countries, however, like India, Brazil and Indonesia.
  • Finally, Syria was front and center in the news in August. Military action is being threatened by the US against Syria for alleged use of chemical gas on its own people. Markets watch this closely because of spillover effect in the area. Oil rose as did equity volatility as equity markets sold off, all on speculation of a potential US strike.
 
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