August market review

September 11, 2014

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

Markets

  • Global financial markets posted mixed results for August. US equities posted gains across most sectors, pushing large cap indices to new record levels.
  • The S&P 500 returned 4.00% for August, and is up 9.89% year-to-date (YTD). The Russell 2000 Index, which tracks domestic small cap stocks, was up 4.96% for the month, and is up 1.75% YTD. The international developed equity index, MSCI EAFE, was down 0.15% for the month, but is up 2.56% YTD.
  • Emerging markets (MSCI EM) continued its rally, up 2.25% in August, and up 10.63% YTD.
  • The Japanese Nikkei 225 was down 1.26% in August, and is down 5.32% YTD. This YTD underperformance has been accompanied by a rise in the Yen.
  • Fixed income yields declined as the yield curve flattened & high yield credit tightened. In August, the 10-year Treasury yield was down 21bps to 2.34%, from 2.55% in July and the 30-year Treasury yield was down 24bps to 3.08%, from 3.32% in July. The Federal Reserve again left the overnight lending rate unchanged at 0-0.25%.
  • Corporate bond prices increased in August. The Barclays Aggregate Index was up 1.10% for August, and up 4.81% YTD. The Credit Suisse Leveraged Loans Index (bank loans) was up 0.23% for August, and up 2.93% YTD

Economic & Geopolitical Headlines

  • According to the estimates from the Bureau of Economic Analysis, the US economy, measured by real gross domestic product (GDP), increased at an annual rate of 4.2% in the second quarter of 2014. In the first quarter, real GDP slowed 2.1 percent.
  • Geopolitical risks remained in the forefront of investors’, and the general public’s, minds in August. Gruesome executions and actions by ISIS in Iraq highlight the growing unrest in the region.
  • The Fed did not meet in August but various Fed board members’ speeches indicate a continuation of the taper, reducing asset purchases further at their next meeting, and staying on the announced schedule. The market is ambivalent in its estimation of whether the Fed may raise interest rates sooner than previously stated, based on the most recent economic news. Chairwoman Yellen has reiterated numerous times that the Fed has no intention of raising rates earlier than mid-2015 but speculation abides that more positive economic news could result in a raise in rates in 1H15.
  • Expansion in manufacturing in the US continues; the PMI in August registered 59.0, an increase of 1.9 points when compared to July’s reading of 57.1. August’s PMI reading of 59.0 reflects the highest reading since March 2011 when the index registered 59.1 percent. A reading above 50 is considered economic expansion.
  • US job growth slowed sharply in August. The Labor Department reported 142,000 jobs were added, the smallest increase in eight months, but the unemployment rate fell one 10th of a percent to 6.1% as more workers dropped out of the labor force. Economists expected an increase of over 200,000 jobs in August. June and July job numbers were revised to show 28,000 fewer jobs created than were previously reported.
  • In August both the unemployment rate (6.1%) and the number of unemployed persons (9.6 million) changed slightly. Over the year, the unemployment rate and the number of unemployed persons have declined by 1.1 percentage points and 1.7 million, respectively.
 
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