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Market Update for the Month Ending August 31, 2015

 

Markets drop around the world

August was the worst month in years for U.S. and international markets, with every major equity index down and many fixed income indices down as well. The S&P 500 Index lost 6.03 percent, the Dow Jones Industrial Average was down 6.20 percent, and the Nasdaq declined 6.86 percent.  

The losses came despite reasonably strong fundamentals. With 98 percent of companies on the S&P 500 reporting results by the end of August, per FactSet, almost three-quarters had beaten earnings expectations and half had beaten sales estimates. Although the earnings surprise level was consistent with past quarters, the sales surprise level was much lower.

Technicals turned strongly negative by month-end. All three major U.S. indices finished August well below their 200-day moving averages, and all are now well below their long-term support levels as well.

Developed international markets were also down, with the MSCI EAFE Index posting a 7.36-percent decline. Nevertheless, fundamentals for the European economy are improving. Further, political risks appear to be waning, suggesting that the market decline was systemic. Emerging markets, as represented by the MSCI Emerging Markets Index, lost 9.20 percent in August. Substantial market declines in China were a major reason.

The global nature of declines in equity markets during August is clearly seen in Figure 1.

Figure 1. Global Equity Market Declines During August 2015

Source: Bloomberg

 

Fixed income also suffered in August. The Barclays Capital U.S. Aggregate Bond Index lost 0.14 percent, and the Barclays Capital U.S. Corporate High Yield Index was down 1.74 percent.

 

August revisions show U.S. economy growing even faster

U.S. economic reports released in August were strong. Second-quarter gross domestic product (GDP) growth was revised upward to a strong 3.7 percent. Consumer confidence dropped by one measure early in the month before fully recovering at month-end, and consumer spending accelerated in July. Business confidence went along for the ride, and housing starts increased, with upward revisions to previous months.

Employment growth was robust. Initial jobless claims remained under 300,000, a sign of strength. The unemployment rate was stable, while the underemployment rate declined, also a sign of strength.

But there were areas of weakness. Business investment declined during the second quarter, and pending home sales pulled back a bit on a month-over-month basis. There were also two surprisingly negative statistics—in industrial production and consumer confidence.

The Federal Reserve remained ambivalent about rate increases, but, at this point, a rate increase in the near future appears to remain on the table.

 

International risks return to the forefront

Although the U.S. and Europe are doing well, China is not. Along with a slowing economy, it has suffered a stock market crash.

China’s government has failed to stabilize its stock markets and stimulate growth, leading many observers to question its competence. Should China’s growth continue to slow, the rest of the world could move closer to recession.

Finally, policy actions that China has taken, notably the recent devaluation of the yuan, have shaken global economies and markets.

 

A difficult August could lead to a difficult fall

U.S. fundamentals are strong, so the market uncertainty is coming from elsewhere, suggesting that the volatility will go on. The Chinese economy is still weakening, and storms are forming in emerging markets following the devaluation of the yuan. Europe is growing but remains politically fraught, and the U.S.-Iran nuclear deal is destabilizing relationships throughout the Middle East.

Though the U.S. has largely been insulated from these trends, that situation may not continue. In addition to international problems, we face the prospect of the Fed deciding to increase interest rates. This move would ratify the U.S. recovery, but it could rattle financial markets.

Still, the U.S. is the most politically stable and economically solid of the major economies, and the outlook for the medium and longer term is solid. Short-term volatility may rock the boat but not enough to affect longer-term outcomes. As always, a properly constructed portfolio may lead to positive returns in good times and provide a stable framework in bad times.

 

Market Thoughts with Brad McMillan - September, 2015

 

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.
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The Financial Consultants of Manning Wealth Management, Inc. are registered representatives and investment advisor representatives with/and offers securities through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Manning Wealth Management is also a Registered Investment Adviser. Advisory services, fixed insurance products and services offered by Manning Wealth Management are separate and unrelated to Commonwealth.
Authored by Brad McMillan, senior vice president, chief investment officer, at Commonwealth Financial Network
© 2015 Commonwealth Financial Network®