In the following piece, Fifth Third’s Investment Management Group recaps the market and how it reacted to various events in the month of August. I hope you find this Financial Market Roundup helpful and informative.

Summer has come and gone and that means football season is upon us. For many fans, their favorite team will be in a “rebuilding” year, a term designated to squads whose immediate future is bleak but whose not-too-distant future remains hopeful. For a lucky few, their favorite team will be anticipating a breakout year, looking to expand upon the successes of previous seasons. In this regard, the global economic recovery (and its central bank participants) is a lot like the upcoming football season. Some central banks, like the Federal Reserve in the U.S. and the Bank of England in the U.K., are becoming increasingly optimistic about their future prospects and are preparing to tighten as their economies reach escape velocity. Other central banks, like those in the Eurozone, Japan and China, are looking less optimistic and are likely to utilize (or already are) a different set of tools to increase the likelihood of policy success in the future.

But before we talk about global central bank policy let’s see what happened to some risky assets this month that posted positive returns*. Large cap domestic stocks generally outperformed their international counterparts, both in developed and emerging economies.

  1. The MSCI World Index, a broad measure of developed world’s stock markets rose 2.26 percent for the month.
  2. The S&P 500, a measure of large U.S. companies, rose 4.00 percent for the month.
  3. The MSCI Emerging Market Index, a broad measure of the emerging world’s stock markets, rose 2.29 percent for the month.
  4. The MSCI REIT Index rose 2.96 percent for the month.
  5. Gold rose 0.39 percent during the month.

The annual Economic Symposium, held in Jackson Hole, Wyoming in late August, emphasized the disparity in the future paths of monetary policy between the Federal Reserve and the European Central Bank (ECB). Euro-area inflation slowed in August and the region’s unemployment rate remained close to record highs, increasing the pressure on the ECB to take action to kindle the region’s faltering recovery. Many investors believe that the ECB should start quantitative easing, much like the bond buying program taken on by the Fed, to steer inflation back toward the ECB’s goal of just under two percent. Consumer prices in the Eurozone rose to an annual rate of just 0.3% in August, the weakest rate increase since October 2009, at a time when unemployment remains north of 11% and GDP growth is essentially flat..

We observe a much rosier picture here in the U.S. and market sentiment here is decidedly positive. We are finally seeing a pick-up in both the housing and manufacturing sectors, and the labor market continues to make steady gains. Initial jobless claims have been below 300K three out of the last four weeks and non-farm payrolls have been below 200K only one time this year. This all suggests that our economy may be approaching the point where support from the Fed may need to be scaled back, and that policy rate lift-off may be sooner than currently forecast (June 2015).

The stark contrast in likely central bank policy from the Fed and ECB appears to be having a significant effect on interest rates here in the United States. The S&P 500 reached new all-time highs (breaks through 2,000!), and second quarter U.S. GDP was revised upward (from 4.0% to 4.2%) on the back of a very strong earnings season, and yet, U.S. Treasury yields continue to stagnate at 12-month lows. What’s keeping the yield on the U.S. 10-year Treasury at such depressed levels? First, is the escalating geopolitical turmoil in Ukraine and Iraq, an argument undermined by a sharp drop in crude prices since late June, suggests that the market isn’t worried about oil supply disruptions. Second, is the continued negative growth surprises coming from Europe, which are keeping Eurozone sovereign bond yields at all-time lows (anchoring U.S. yields) and are incentivizing the ECB to devalue their currency (i.e. sell euro/buy U.S. Treasuries). The third factor relates to the supply of U.S. Treasuries, which has been falling in concert with the declining budget deficit. A smaller deficit usually means we may issue less debt, which generally reduces the overall supply of new Treasuries, keeping prices elevated.


Market commentary provided by Fifth Third Private Bank. *Source of statistics is Bloomberg.com. Returns are calculated from market close on 7/31/14 through 8/29/14. This information is current as of the date of this letter and the opinions expressed are subject to change at any time, based on market and other conditions. This information is intended for educational purposes only and does not constitute the rendering of investment advice or specific recommendations on investment activities and trading. The mention of a specific security within this letter is not intended as a solicitation to buy or sell the specific security. Index performance shown within this letter is not representative of any Fifth Third managed account.

Investing involves risk, including the possible loss of principal invested. Diversification does not assure or guarantee better performance and cannot eliminate the risk of investment loss.

Past performance is no guarantee of future results. Indexes are unmanaged, do not incur investment management fees, do not represent the performance of any particular investment, and may not be invested directly into by investors. Small company investing involves specific risks not necessarily encountered in large company investing such as increased volatility. Investments in foreign markets entail special risks such as currency, political, economic and market risks.

S&P 500 Index is a composite of 500 companies, amongst the largest based in the United States, and it often used as a measure of the overall U.S. stock market.

The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 23 emerging market country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey* and United Arab Emirates.

The MSCI US REIT Index is a free float-adjusted market capitalization index that is comprised of equity REITs. The index is based on MSCI USA Investable Market Index (IMI) its parent index which captures large, mid and small caps securities. With 137 constituents, it represents about 99% of the US REIT universe and all securities are classified in the REIT sector according to the Global Industry Classification Standard (GICS®).

Gold Index is the U.S. dollar per Troy ounce

The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MSCI World Index consists of the following 23 developed market country indexes: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States.

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Are Not FDIC Insured

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