Sept. 24, 2018 Market Update for the Month Ending August 31, 2018
A mixed month for markets
U.S. markets performed well in August. The Nasdaq Composite gained 5.85 percent, the S&P gained 3.26 percent, and the Dow Jones Industrial Average rose 2.56 percent.
These solid results were bolstered by strong fundamentals. According to FactSet, the estimated earnings growth rate for the S&P 500 was 25 percent in the second quarter. Further, approximately 80 percent of S&P 500 companies beat their earnings per share estimates. All three indices were also supported technically, staying above their 200-day moving averages.
The international markets did not do as well. Developed markets, as represented by the MSCI EAFE Index, lost 1.93 percent, and emerging markets, represented by the MSCI Emerging Markets Index, declined 2.67 percent. Both indices remained below their 200-day moving averages for the month.
Fixed income had a better month. Falling interest rates on the intermediate and long portions of the curve provided a tailwind to performance. The 10-year Treasury note started the month at 3 percent, hit 2.82 percent, and finished at 2.85 percent. The Bloomberg Barclays Aggregate Bond Index gained 0.64 percent, and high-yield bonds gained 0.74 percent.
Consumer data shows strength
Consumer spending figures were strong, driving overall growth for the economy. July’s personal income and spending report showed growth of 0.3 percent and 0.4 percent, respectively. Retail sales data showed 0.5-percent growth, and nonstore retail sales grew 0.8 percent.
Continued growth has also fed consumer confidence, with the Conference Board Consumer Confidence Index hitting an 18-year high. Two of the major drivers of consumer confidence are employment growth and stock market performance. Clearly, U.S. equities did their part to boost confidence this month. Employment was solid as well. July’s headline figure added 157,000 jobs, and previous months were revised upward. Unemployment returned to 3.9 percent, while wage growth met expectations.
Housing slowdown continues
Housing remains a concern, however. Existing and new home sales fell in July, against expectations for a modest increase. While these can be volatile figures from month to month, the overall trend has been negative since we reached cyclical peaks in November 2017 (see Figure 1). On an absolute basis, sales are still at healthy levels compared with prior years, and there are no immediate concerns.
Figure 1. Total Existing Home Sales, U.S., 2008–2018
One reason for the slowdown in sales is low inventory levels. July’s housing starts grew by only 0.9 percent, while homebuilder confidence fell. Further, for the first time in years, the Federal Open Market Committee meeting minutes revealed concerns around a housing slowdown.
Despite its concerns, markets expect the Federal Reserve (Fed) to hike rates by 25 basis points at its September meeting. A December hike is also likely. Markets would likely see interest rate hikes as a positive sign for overall economic health, as the Fed would be unlikely to raise rates if it thought the economy was turning over.
Political risks can shake markets
While the economic news remained encouraging, politics presented a risk. Turkey—and emerging markets in general—were volatile. A decline of more than 30 percent in the Turkish lira relative to the dollar and euro stoked fears of a contagion across emerging markets. Right now, it does not look like we’ll face a major emerging market crisis, but turbulence can certainly be expected.
On the domestic side, the midterm congressional elections in November could rattle markets. Again, while this is not likely to cause a widespread market panic, some additional volatility as we head into the fall would not be surprising.
On a more positive note, reports of a preliminary trade agreement between the U.S. and Mexico have calmed fears of a trade war. Trade talks between the U.S. and Canada are another good sign.
Positive outlook for U.S. investors
The economy is growing, jobs are plentiful, and markets are hitting highs. But risks certainly remain, as a slowdown in housing and political uncertainty could spook markets.
While times are good now, they can change quickly. As such, a well-diversified portfolio that matches risk and return guidelines remains the best path to follow for achieving long-term financial goals.
All information according to Bloomberg, unless stated otherwise.
Disclosure: Certain sections of this commentary contain forward-looking statements 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 Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. 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 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 Bloomberg Barclays 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 Bloomberg Barclays government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg Barclays 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.
Authored by Brad McMillan, CFA®, CAIA, MAI, managing principal, chief investment officer, and Sam Millette, fixed income analyst, at Commonwealth Financial Network®.
© 2018 Commonwealth Financial Network®