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 break-out 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.
- The MSCI World Index, a broad measure of developed world's stock markets rose 2.26 percent for the month.
- The S&P 500, a measure of large U.S. companies, rose 4.00 percent for the month.
- The MSCI Emerging Market Index, a broad measure of the emerging world's stock markets, rose 2.29 percent for the month.
- The MSCI REIT Index rose 2.96 percent for the month.
- 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 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
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or sell the specific security. Index performance shown within this letter is
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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.
MSCI EMF (Emerging
Markets Free) Index is a free float-adjusted market
capitalization index that is designed to measure equity market performance in
the global emerging markets. As of June 2006 the MSCI Emerging Markets Index
consisted of the following 25 emerging market country indices: Argentina,
Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India,
Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru,
Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.
MSCI US REIT Index
is a free float- adjusted market capitalization weighted index that is
comprised of equity REITs that are included in the MSCI US Investable Market
2500 Index, with the exception of specialty equity REITs that do not generate a
majority of their revenue and income from real estate rental and leasing
operations. The index represents approximately 85% of the US REIT universe.
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 24 developed market country indices: Australia,
Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong,
Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal,
Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United
is the U.S. dollar per Troy ounce.
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