News

In August, U.S. equities bounced back from a poor start to the month to finish with strong gains. Bonds rallied across the board as both yields and spreads fell during the month. August experienced several troublesome markers including August 1st capping the worst week in the market in two years, Vladimir Putin displaying continued aggression in the Ukraine, Europe’s economic engine sputtering, and the ever-present radical Islamists drumbeat of insanity.

On the positive side were several positive notables including average jobless claims falling to eight year lows, the S&P 500 setting new record highs over 2,000 for the first time, strong 2Q corporate earnings & revenue growth of 4.4% and 9.3% respectively, and the U.S. budget deficit narrowing to its smallest levels since 2007.

U.S. Treasury rates fell to extremely low levels as risk aversion (Putin), limited supply (low deficits), and low relative European and Japanese yields drove investors into treasuries. The curve flattened further as 10 & 30 year bond yields fell while the short end remained anchored by Fed policy and benign near term inflation outlooks. The high yield market sold off and quickly recovered as we saw a record breaking weekly outflows (retail) from high yield mutual funds and subsequent buying (institutions) netting a tightening in spreads from 404 to 380 over Treasuries.

Broad U.S. economic results on the month were positive as 2Q GDP was revised upward to 4.2% on the back of strong fixed investment and reduced inventory builds. Fixed nonresidential investment added 0.35% to annualized GDP growth, which is impressive considering investment makes up only 12.62% of nominal GDP. The job market continued to show signs of improvement as well with unemployment registering at 6.1% for August. The most recent Case-Shiller housing market indicators reflect an 8% yearly price gain. Most markets are up double digits off the 2009 lows while the index remains 17% below its high mark.

Overseas markets were driven by continued improvement in the emerging markets (Brazil +11%, Mexico +5%) while developed markets in Europe (+0.4%) and Japan (-2.2%) stumbled. Commodity markets sold off on the back of a strong U.S. Dollar which rallied sharply (+1.5%) in August.