Market Commentary: Market Recap
Market Update for the Month Ending August 31, 2016
World markets resilient in August
Global markets ended August slightly positive, as early gains were partially offset by volatility toward month-end. U.S. equity markets posted small increases. The S&P 500 Index closed the period up 0.14 percent, the Dow Jones Industrial Average was up 0.26 percent, and the Nasdaq led the way with a gain of 1.18 percent.
The positive market performance was supported by better-than-expected earnings. With 98 percent of S&P 500 companies reporting second-quarter results by August’s end, 71 percent had beaten earnings expectations and 53 percent had reported sales above expectations.
Technicals remained positive in August. All three major U.S. indices finished the period above their 200-day moving averages, and all three stayed comfortably above their trend lines.
Developed international markets showed small gains, with the MSCI EAFE Index up 0.07 percent for the month. The index dipped below its 200-day moving average at the beginning of August but ended the period well above that level.
The MSCI Emerging Markets Index closed August with a 2.52-percent gain. The four largest emerging market countries—Brazil, Russia, India, and China—posted positive returns, which led to the index’s sizeable uptick. Technicals also continued positive.
Fixed income had mixed results in August. The Barclays Capital Aggregate Bond Index ended the month down 0.11 percent, due to rising interest rates. The yield on the 10-year Treasury increased from 1.46 percent at the beginning of the period to 1.58 percent by month-end. The Barclays Capital U.S. Corporate High Yield index–less influenced by interest rates—finished August up 2.09 percent.
U.S. economic data continues to improve
Although second-quarter 2016 gross domestic product growth was revised down from 1.2 percent to 1.1 percent, this was in line with expectations. Most other economic reports released in August were positive and supportive of faster growth for the second half of the year.
Key to potential growth was a very strong jobs report at the start of August. The underlying data was positive, too, with wage growth beating expectations and hovering near post-recession highs year-over-year. Despite the slowdown in the recent August jobs report, overall the still-positive jobs data supports the continuing U.S. economic recovery.
Business confidence remained positive, albeit at levels slightly lower than those reported in July. Both the ISM Manufacturing and Non-Manufacturing indices indicated continued expansion during August. Additionally, increases in industrial production and manufacturing highlighted improvement in the manufacturing sector.
Retail sales, however, were flat in August, largely due to a slowdown in auto sales. But this followed three months of strong retail sales.
Housing starts and new home sales substantially beat expectations, indicating continued and even increasing growth. But, as illustrated in Figure 1, new home sales have a way to go before approaching their all-time highs.
Figure 1. New Single-Family Home Sales, August 2002–July 2016
Source: U.S. Census Bureau/Haver Analytics
International risks were muted but remain
Although international uncertainty remains, there were no major market-moving events overseas during August. Despite the tranquility, a handful of developments could impact U.S. markets going forward. The EU’s ruling that Apple owes it $14 billion in back taxes could lead to friction with the U.S. And China remains a concern, as it continues to hold its currency near four-year lows against the dollar.
All eyes on central banks
At the Jackson Hole Economics Policy Symposium, Federal Reserve Chair Janet Yellen spoke in positive terms about the U.S. economy; the market reacted by increasing the odds for at least one rate hike in 2016. Conversely, the European Central Bank and Bank of Japan continue to increase their asset-purchasing programs. This policy divergence could negatively affect domestic and international markets.
Uncertainty remains heading into fall
Although August was calm, September may show more activity, as fall will bring potentially destabilizing events—uncertainty surrounding China’s growth, potential rate hikes, the presidential election, and more—that could increase market volatility.
Nevertheless, the fundamentals of the U.S. economy are healthy, and any volatility will be cushioned by that reality. As always, a well-diversified portfolio, combined with a long-term perspective, presents the best means for accomplishing financial goals, even in the face of short-term uncertainty.
All information according to Bloomberg, unless stated otherwise.Disclosure: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Barclays Capital Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Barclays Capital government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Barclays Capital U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.