Record Setting Rally Continues
- U.S. equities continued their recent rally in August. The S&P 500 Index finally eclipsed its January peak and put in a new all-time high in August.
- Continued U.S. dollar strength and ongoing trade uncertainties kept the pressure on international equities, which were broadly lower for the month.
- Most bond sectors enjoyed positive results in August as the yield on the 10-year U.S. Treasury dropped during the month. High-yield bond returns continued to lead the other fixed income sectors on a year-to-date basis.
- The second revision to Q2 2018 GDP growth reflected a 4.2% annualized growth rate – a slight increase from the initial estimate and the best mark since Q3 2014.
The S&P 500, NASDAQ Composite and Russell 2000 indices each hit new all-time highs in August. The Dow Jones Industrial Average has yet to reach its prior high set in January. General themes for 2018 persisted in August with small caps outperforming large caps, growth stocks outperforming value stocks and U.S. equities outperforming international equities. All major U.S. equity indices advanced in August and added to positive year-to-date gains. The S&P 500 advanced 3.3%, the Russell 2000 rose 4.3%, and the Russell 3000 climbed 3.5%. The disparity between growth and value widened further in August as the Russell 1000 Growth Index gained 5.5% and the Russell 1000 Value Index advanced only 1.5%, leaving year-to-date results at 16.4% and 3.7%, respectively.
The disparity between U.S. and international equities also widened in August. While progress was made with trade negotiations between the U.S. and Mexico late in the month, no resolution was found with Canada, and trade tensions continued to linger with China. The U.S. dollar rose to its strongest level of 2018 in mid-August, which was another headwind to international equity results. Overall, international equities continued to struggle in August as the MSCI ACWI ex USA Index, a broad measure of international equities, dropped about -2.1% and the MSCI Emerging Markets Index declined -2.9%. International equities are broadly lower so far in 2018 with emerging markets showing the largest declines in the global equity markets on a year-to-date basis.
FIXED INCOME MARKETS
After starting the month around 2.96%, the 10-year U.S. Treasury yield declined to 2.86% by the end of August. The backdrop of declining rates helped most sectors of the bond market advance during the month. The Bloomberg Barclays U.S. Aggregate Bond Index and the Bloomberg Barclays U.S. Credit Index gained 0.64% and 0.51%, respectively. Despite this progress, these two indices remained in negative territory year to date. Longer-dated U.S. Treasuries showed some of the best results for the month reflecting their sensitivity to dropping interest rates in August, but they too continued to show negative year-to-date results as rates have risen overall since the end of 2017.
The Bloomberg Barclays U.S. Aggregate Corporate High Yield Index advanced 0.74% in August and continued to stand out on a year-to-date basis with a 2.0% gain. Muni bonds and TIPS have also shown some modest positive year-to-date results. High yield bonds have been the best performing fixed income asset class in 2018 as investors continue to be rewarded for taking on credit exposure during this ongoing economic expansion.
Economic data continued to reflect the ongoing expansion of the U.S. economy. Consumer confidence remained high and, more importantly, retail spending data reflected that the consumer’s confidence is translating into spending activity. Although non-farm payroll additions of 157,000 were below expectations in July, the prior two-month’s net revisions were increased by 59,000. The unemployment rate dropped to 3.9% as expected, while average hourly earnings increased 2.7% from the prior year matching expectations as well. The July ISM manufacturing and non-manufacturing indices were both below expectations, but both also remained well above 50, the dividing line between expansion and contraction for these indices. Finally, the second reading of Q2 2018 GDP growth was revised modestly higher to a 4.2% annualized growth rate, when it was expected to be reduced slightly to 4.0% compared to the preliminary reading of 4.1%.
The Federal Open Market Committee had a meeting that bridged the final day of July and first day of August. No change in policy rates was announced at its conclusion, but the focus of the market has now turned to the late September meeting as the next likely time for a rate hike. The annual Jackson Hole symposium took place in August and Fed Chair Powell’s speech largely continued to signal the Fed’s gradual tightening cycle will be the ongoing course of action.
|ISM Non-Manf. Composite||July||58.6||55.7||59.1||—|
|Change in Nonfarm Payrolls||July||193k||157k||213k||248k|
|Average Hourly Earnings YoY||July||2.70%||2.70%||2.70%||—|
|JOLTS Job Openings||Jun||6625k||6662k||6638k||6659k|
|PPI Final Demand MoM||July||0.20%||0.00%||0.30%||—|
|PPI Final Demand YoY||July||3.40%||3.30%||3.40%||—|
|PPI Ex Food and Energy MoM||July||0.20%||0.10%||0.30%||—|
|PPI Ex Food and Energy YoY||July||2.80%||2.70%||2.80%||—|
|CPI Ex Food and Energy MoM||July||0.20%||0.20%||0.20%||—|
|CPI Ex Food and Energy YoY||July||2.30%||2.40%||2.30%||—|
|Retail Sales Ex Auto and Gas||July||0.40%||0.60%||0.30%||0.20%|
|Industrial Production MoM||July||0.30%||0.10%||0.60%||1.00%|
|Existing Home Sales||July||5.40m||5.34m||5.38m||—|
|New Home Sales||July||645k||627k||631k||638k|
|Durable Goods Orders||July P||-1.00%||-1.70%||0.80%||0.70%|
|GDP Annualized QoQ||2Q S||4.00%||4.20%||4.10%||—|
|U. of Mich. Sentiment||Aug F||95.5||96.2||95.3||—|
|S&P CoreLogic CS 20-City YoY NSA||Jun||6.40%||6.31%||6.51%||6.54%|
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