Monthly Economic Update August 2014
Economic and geopolitical forces led to a highly unusual, albeit positive, environment for investment markets in August. By month-end, favorable domestic economic data enabled the S&P 500 index to hit its 32nd high for the year. Labor market strength, small business confidence, an upward revision to Q2 GDP growth, solid earnings results, and an acceleration in manufacturing were all stock market positives. Fixed income markets thrived as well, but for different reasons. First, geopolitical tensions in Iraq, Ukraine, and Israel pushed yields lower as investors sought traditional safe havens in the bond markets. Second, in contrast to the U.S., economic weakness prevailed internationally. GDP results for Q2 showed Europeâ€™s already weak recovery had faltered, and Japanâ€™s economy contracted materially. Likewise, China has shown signs of slowing this quarter. Resulting expectations for aggressive central bank support, particularly by the ECB, drove both international and domestic bond yields to fresh lows. The fact that inflation is both contained in the U.S. and uncomfortably low in Europe gives central bankers plenty of latitudeâ€” even the needâ€”for a strong policy response. In the end, global tension, weak international economies, low inflation, and aggressive central bankers all provide investors with greater confidence in the persistency of low, if not falling, yields.
Augustâ€™s Economic Releases
The S&P 500 gained 4.0% for the month and is up 9.9% for the year. Developed international equity markets, as defined by the MSCI EAFE index, were down 0.2% in August while the MSCI Emerging Markets index rose 2.3%. Year-to-date, international developed and emerging markets have returned 2.6% and 9.8%, respectively.
In the fixed income market, the Barclays U.S. Aggregate index gained 1.1% for the month, and the yield on the 10-year U.S. Treasury note fell 23 basis points to end at 2.35%. For the year, the Barclays U.S. Aggregate is up 4.8%. High yield credit spreads tightened somewhat during the month but remain wider than lows set in June. The Barclays High Yield index advanced 1.6% in the process for a 5.7% YTD gain. Although junk bonds have slightly outperformed the Barclays U.S. Aggregate in 2014, they have underperformed both investment grade corporate bonds as well as municipals. International bonds were up 0.2% for the month taking year-to-date gains to 4.3%. In other markets, the DJ U.S. Real Estate index is up 20.3% in 2014 after rising 3.5% in August while commodities, now essentially flat for the year, lost 1.0%.
This commentary was written by Robert W. Lamberti, CFA, Vice President of Investments and a Principal of Summit Financial Resources, Inc. Source of performance: MorningstarÂ®. Indices are unmanaged and cannot be invested into directly. The investment and market data contained in this newsletter is not an offer to sell or purchase any security or commodity. Standard & Poorâ€™s 500 Index (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The MSCI EAFE and Emerging Markets Indexes were created by Morgan Stanley Capital International (MSCI) and designed to measure equity market performance in global developed and emerging markets, respectively. The Barclays Aggregate Bond Index is a market capitalization-weighted index comprised of government securities, mortgage-backed securities, asset-backed securities, corporate securities, and a small number of foreign bonds traded in the U.S. It is used to represent the universe of bonds in the domestic market. REITs, Real Estate Investment Trusts, are securities that invest in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, however, may have liquidity constraints. Past performance does not guarantee future results. Information throughout this Newsletter, whether stock quotes, charts, articles, or any other statement or statements regarding markets or other financial information, are obtained from sources which we, and our suppliers believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Neither we nor our information providers shall be liable for any errors or inaccuracies, regardless of cause, or the lack of timeliness of, or for any delay or interruption in the transmission thereof to the reader. To unsubscribe from this investment newsletter please reply to this email with â€œunsubscribeâ€ in the subject. Opinions expressed are subject to change without notice and are not intended as investment advice or a guarantee of future performance. Consult your financial professional before making any investment decision. Securities and Investment Advisory Services offered through Summit Equities, Inc. Member FINRA/SIPC, and Financial Planning Services offered through Summit Equities, Inc.â€™s affiliate Summit Financial Resources, Inc. 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600, Fax: 973-285-3666.