Commentaries

PMC Weekly Review - September 2, 2016

A Macro View – August Monthly Recap

Domestic equity markets were mostly higher in August, extending a post-Brexit rally. August has often been a high-volatility month that ushers in a difficult seasonal period, but stocks showed few signs of weakening as September approached. Although economic data abroad remains somewhat muddled, the domestic economy is enjoying a somewhat “strong patch,” as various segments have shown signs of strength. Investors seem to have put concerns about Brexit in the rearview mirror – at least for the time being – and have turned their attention to speculating as to when the Federal Reserve may again raise rates. Currently, the interest rate futures market is assigning a 28% probability of a rate hike in September, and a 58% chance of an increase occurring by December. In addition, how investors are handicapping the presidential election race will have an increasingly strong sway on markets as November approaches. The latest estimate of second quarter real gross domestic product (GDP) came in at +1.1%, below the prior estimate of +1.2%, but in line with forecasts. The August employment report, released today, was a bit disappointing in that employers added a mere 151,000 jobs during the month, below both the consensus estimate of 180,000 and last month’s revised increase of 275,000. The unemployment rate remained at 4.9%. The lackluster growth is an indication to some that the Fed should refrain from raising rates at its upcoming meeting later this month.

Within this landscape, broad market indices were on balance slightly higher in August. The S&P 500 advanced by +0.1%, and is now up +7.8% year-to-date. The Dow Jones Industrial Average (DJIA) also gained ground, posting a gain of 0.3%. The tech-heavy Nasdaq Composite Index outpaced the other broad indices, gaining +1.2%. The Russell 2000 Index of small cap stocks again outperformed the Russell 1000 Index of large cap stocks, with returns of +1.8% and +0.1%, respectively. Value stocks outperformed growth stocks. In terms of sector performance, the top performers were financials, information technology, and energy, with returns of +3.8%, +2.1% and +1.2%, respectively. Telecommunications services and utilities were the poorest performers, with returns of -5.7% and -5.6%, respectively. Commodities declined, giving back -1.8%. REITs sank, declining by -3.4%.

International equity markets were mostly higher, again faring better than many US equity indices. The MSCI World ex-U.S. Index advanced by +0.3%. Emerging markets continued to rebound nicely, with the MSCI Emerging Markets Index gaining +2.5%. The index is now up +14.6% year-to-date. The MSCI EAFE Index, which measures developed markets performance, inched higher by +0.1%. Regionally, China and the Asia region generally generated the best relative performance, advancing +7.4% and +4.0%, respectively. The Pacific ex-Japan region and Europe were the poorest relative performers, generating returns of -1.5% and +0.3%, respectively.

Fixed income markets were mixed, as investors contemplate when the Fed will again raise rates. Domestically, yields have remained in a trading range, although they have crept higher as speculation mounts that the Fed will move to raise rates sooner rather than later. Within this environment, the 10-year U.S. Treasury yield ended the month at 1.57%, up 11 basis points from the 1.46% level of July 31. Performance of broad-based fixed income indices was varied in August, with the Barclays U.S. Aggregate Bond Index declining -0.1%. Global fixed income markets also declined, with the Barclays Global Aggregate ex-U.S. Index shedding -0.8%. Intermediate-term corporate bonds were higher, as the Barclays U.S. Corporate 5-10 Year Index gained +0.1%. The Barclays U.S. Corporate High Yield Index added +2.1%. Municipals also posted modest gains, advancing +0.1%.

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