Hazards remained on the horizon last month, but that didn’t stop stocks from advancing – the S&P 500 rose 1.98% in August. Anticipation of central bank action helped, and so did more good news from the housing sector. Headlines from Europe brought anxieties, but not alarms. Gold touched a five-month high and retail gas prices flirted with the $4 mark. Stock indices around the world logged monthly gains as bullish sentiment prevailed. Quite simply, August defied expectations – ending up as a pleasant surprise for an uneasy Wall Street.1,2
DOMESTIC ECONOMIC HEALTH
It is widely noted that consumer spending accounts for about two-thirds of GDP. So the 0.4% rise in the category for July – the biggest leap in five months – was welcome after a flat June. Personal incomes also rose 0.3% for the second consecutive month. With the economy expanding 1.7% from April-June by the government’s revised estimate, analysts hoped that the July increase signaled a pickup in growth. Another hint that it might: retail sales had soared 0.8% in July after falling 0.7% for June. They hadn’t advanced since March.3,4
It is widely noted that consumer spending accounts for about two-thirds of GDP. So the 0.4% rise in the category for July – the biggest leap in five months – was welcome after a flat June. Personal incomes also rose 0.3% for the second consecutive month. With the economy expanding 1.7% from April-June by the government’s revised estimate, analysts hoped that the July increase signaled a pickup in growth. Another hint that it might: retail sales had soared 0.8% in July after falling 0.7% for June. They hadn’t advanced since March.3,4
Did
growth return to the manufacturing sector in August? According to the Institute
for Supply Management’s manufacturing PMI, no. Last month’s PMI was 49.6, down
from July’s 49.8 mark. ISM’s service sector PMI continued to stay above
contraction territory, having come in at 52.6 in July after a 52.1 June
reading. July’s durable goods report was only mildly positive: orders were up
4.2% in the big picture, but down 0.4% with transportation orders subtracted.5,6,7
Consumer
inflation (as measured by the Consumer Price Index) was flat in July, as it had
been in June. Core CPI did rise 0.1%. Annualized inflation was running at 1.4%,
the smallest yearly gain recorded since November 2010. Producer prices,
however, advanced by 0.3% in July, more than in any month since February.8,9
The
jobless rate had ticked up to 8.3% in July and gas prices had taken their toll
on household budgets, so consumer confidence fell – the Conference Board’s
August poll showed it at the lowest level since November (60.6). Consumer
sentiment (a slightly different animal) improved, however – at least according
to the University of Michigan’s August survey, which hit a 3-month peak of
74.3.3,10
Wall
Street watched and waited for some sort of clue from the Federal Reserve. Could
QE3 be ahead? Did the Fed think the economy would be okay without it? A strong
signal flashed on August 31, when Fed Chairman Ben Bernanke noted at the
central bank’s annual Wyoming symposium that the state of the economy was “far
from satisfactory” and that the Fed “should not rule out” easing. That comment led
some investors to believe further action was coming in fall.11
GLOBAL ECONOMIC HEALTH
The good news out of Europe in August? Yields on 10-year notes from Spain and Italy respectively fell below 7% and 6%, and Spain agreed to set up a “bad bank” to clean up toxic assets as a condition of its rescue loan. The bad news? It appeared Spain might need even more than €100 billion in rescue funds from the European Union, actual bond buying by the European Central Bank appeared no better than a fall prospect, and Greece asked the EU for more time to manage its austerity cuts with France and Germany firmly against an extension. The European Financial Stability Facility (the EU’s bailout fund) would presently expand into the permanent European Stability Mechanism – provided that Germany’s high court didn’t declare the ESM illegal. Some analysts felt that the ECB would lower its benchmark interest rate 25 basis points to 0.50% in early September. Euro area statistics showed inflation at 2.6% and unemployment at 11.3% in July.12,13,14,15,16,17
A
global manufacturing slump continued in August. China’s official PMI dropped
below 50 for the first time in nine months; the nation’s Markit HSBC PMI was
already under that figure. (China did not cut interest rates in August, as it
had in June and July.) Taiwan’s PMI hit its lowest level since November, and
South Korea’s manufacturing index was below 50 for a third straight month. On
the other hand, the U.S., the EU and Great Britain saw PMIs rise – although while
the Markit PMI for the eurozone rose 1.3% off a 3-year low of 44.0, it was
still well into contraction territory. Manufacturing PMIs in Indonesia and
India showed expansion (India’s benchmark PMI has been above 50 for more than
three years).18
WORLD MARKETS
Spain’s IBEX 35 staged a 10.13% rebound in August, and the FTSE Italia All Share rose 8.03%. While the major European indices didn’t match those gains, they were also higher for the month – FTSE 100, +1.35%; CAC 40, +3.69%; DAX, +2.93%. In the Americas, Brazil’s Bovespa (+1.72%), Argentina’s MERVAL (+0.99%) and Canada’s TSX Composite (+2.44%) rallied. In the Asia Pacific region, the Hang Seng (-1.59%) and Shanghai Composite (-2.67%) were August losers, but other benchmarks were winners: Australia’s All Ordinaries (+1.16%) and Japan’s Nikkei 225 (+1.67%). While the MSCI World Index rose 2.29% in August, the MSCI Emerging Markets Index slipped 0.54%.19,20
Spain’s IBEX 35 staged a 10.13% rebound in August, and the FTSE Italia All Share rose 8.03%. While the major European indices didn’t match those gains, they were also higher for the month – FTSE 100, +1.35%; CAC 40, +3.69%; DAX, +2.93%. In the Americas, Brazil’s Bovespa (+1.72%), Argentina’s MERVAL (+0.99%) and Canada’s TSX Composite (+2.44%) rallied. In the Asia Pacific region, the Hang Seng (-1.59%) and Shanghai Composite (-2.67%) were August losers, but other benchmarks were winners: Australia’s All Ordinaries (+1.16%) and Japan’s Nikkei 225 (+1.67%). While the MSCI World Index rose 2.29% in August, the MSCI Emerging Markets Index slipped 0.54%.19,20
COMMODITIES MARKETS
Aside
from two notable retreats (coffee at -5.53% and natural gas at -12.78%), most
key commodities did well in August. NYMEX crude rose 9.55%, ending the month at
$96.47 a barrel. RBOB gasoline climbed 7.15%. At the pump, August also brought
a 9.40% jump in the price of regular unleaded ($3.83 on August 31). Heating oil
rose 11.66%. Silver had a great month (+12.64%). Gold (+4.79%) and copper
(+1.16%) also posted gains, gold rising to a 5-month peak on August 31 and
settling at $1,687.60 an ounce. Cotton rose 8.30% while corn (+0.06%) and wheat
(+0.79%) managed small advances. The U.S. Dollar Index pulled back 1.81% last
month.2
REAL ESTATE
Existing home sales were up 2.3% last month, with the pace 10.4% better than a year ago; the National Association of Realtors also reported a 2.4% rise in pending home sales in August (they were 12.4% above year-ago levels). June’s S&P/Case-Shiller Home Price index showed an overall annual gain (+0.5%) for the first time in 20 months. New home sales rose 3.6% in August and were up 25.3% annually.21,22,23
Existing home sales were up 2.3% last month, with the pace 10.4% better than a year ago; the National Association of Realtors also reported a 2.4% rise in pending home sales in August (they were 12.4% above year-ago levels). June’s S&P/Case-Shiller Home Price index showed an overall annual gain (+0.5%) for the first time in 20 months. New home sales rose 3.6% in August and were up 25.3% annually.21,22,23
Mortgage
rates finished August higher. Freddie Mac noted the following movements in interest
rate averages between its July 26 and August 30 surveys: 30-year FRMs, 3.49% to
3.59%; 15-year FRMs, 2.80% to 2.86%; 5/1-year ARMs, 2.74% to 2.78%. The
exception: average rates on 1-year ARMs decreased from 2.71% to 2.63%.24
LOOKING BACK…LOOKING
FORWARD
When was the last time that the Dow, S&P and NASDAQ all gained in August? 2009. Speaking of gains and positivity, stocks advanced for the seventh month out of the past eight.1,2,25
When was the last time that the Dow, S&P and NASDAQ all gained in August? 2009. Speaking of gains and positivity, stocks advanced for the seventh month out of the past eight.1,2,25
As September starts, there are analysts wondering if a correction might soon occur. At any indication of possible Fed or ECB bond buying (overt or subtle), stocks have moved north. The thinking is that the market may be heading for a disappointment: if signals of decisive action from the ECB or the Fed seem to wane and Spain’s debt crisis worsens, appetite for risk might swiftly decline. Throw in any complications with Greece and another round of indicators that might further confirm economic deceleration in China (its latest set of leading indicators was its weakest in 43 months) and you could see a hasty retreat for stocks. Historically, September has been the S&P 500’s poorest month, with an average 0.65% loss for the index since 1945. An exception occurred in 2010 when Ben Bernanke used the Jackson Hole Fed symposium to talk about what would become known as QE2 – that led to the best September for stocks in the post-WWII era. September could surprise us as long as our economy continues to make progress and headlines from China and Europe don’t startle us.15
UPCOMING ECONOMIC RELEASES: Across the rest of
September, here is the data stream and schedule of notable events: a critical
ECB policy meeting and the ISM service sector index for August (9/6), the
August employment report (9/7), a German constitutional court ruling on the
legality of the European Stability Mechanism and July wholesale inventories (9/12),
a Fed policy announcement and the August PPI (9/13), August retail sales
figures and industrial output, July business inventories, the University of
Michigan’s preliminary September consumer sentiment survey and the August CPI (9/14),
September’s NAHB housing market index (9/18), August existing home sales, housing
starts and building permits (9/19), the August edition of the Conference Board
Leading Economic Indicators index (9/20), the Conference Board’s September
reading of consumer confidence, the July Case-Shiller home price index and
July’s FHFA housing price index (9/25), August new home sales (9/26), August
pending home sales and durable goods orders and the government’s final estimate
of Q2 GDP (9/27), and then August personal spending and the University of
Michigan’s final consumer sentiment survey for the month (9/28).
MONTHLY QUOTE
“Happy people always look for opportunities
where others are seeing crisis.”
–
Deepak ChopraTo Your Prosperity,
Kevin Kroskey
This
article prepared in conjunction with Peter Montoya.
Citations.
1 - www.cnbc.com/id/48858445 [8/31/12]
2 - money.msn.com/market-news/post.aspx?post=461e046e-bbfc-4426-8cdf-e3ae3e518d70
[8/31/12]
3 - www.reuters.com/article/2012/08/30/us-economy-idUSBRE87S0ID20120830
[8/30/12]
4 -
articles.marketwatch.com/2012-08-14/economy/33191357_1_sales-at-gasoline-stations-furniture-store-sales-retail-sales
[8/17/12]
5 - www.ism.ws/ISMReport/MfgROB.cfm [9/4/12]
6 - www.ism.ws/ISMReport/NonMfgROB.cfm [8/3/12]
7 -
www.mysanantonio.com/news/article/Drop-in-key-US-durable-goods-orders-shows-weakness-3812413.php
[8/24/12]
8 - www.reuters.com/article/2012/08/15/usa-economy-idINL2E8JF2C720120815
[8/15/12]
9 - www.fxstreet.com/news/forex-news/article.aspx?storyid=0f19ea54-c96b-44db-9fa7-eebeb7368190
[8/14/12]
10 - www.marketwatch.com/story/consumer-sentiment-rises-slightly-in-august-2012-08-31
[8/31/12]
11 - www.cbsnews.com/8301-505123_162-57504249/bernanke-from-jackson-hole-no-qe3...yet/
[8/31/12]
12 - www.nytimes.com/2012/09/03/business/global/03iht-ecb03.html
[9/3/12]
13 - www.cnbc.com/id/48825430 [8/29/12]
14 - www.cnbc.com/id/48882795
[9/3/12]
15 - www.cnbc.com/id/48844733 [8/31/12]
16 - epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home
[9/4/12]
17 - topics.nytimes.com/top/reference/timestopics/organizations/e/european_financial_stability_facility/index.html
[7/20/12]
18 - www.independent.ie/business/european/worldwide-manufacturing-businesses-contract-in-august-3217618.html
[9/3/12]
19 - markets.on.nytimes.com/research/markets/worldmarkets/worldmarkets.asp
[8/31/12]
20 -
mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html
[8/31/12]
21 - www.realtor.org/news-releases/2012/08/existing-home-sales-improve-in-july-prices-continue-to-rise
[8/22/12]
22 - money.cnn.com/2012/08/23/real_estate/new-home-sales/index.html/
[8/23/12]
23 - blogs.wsj.com/economics/2012/08/29/u-s-pending-home-sales-highest-since-april-2010/
[8/29/12]
24 - www.freddiemac.com/pmms/ [8/31/12]
25 -
montoyaregistry.com/Financial-Market.aspx?financial-market=an-introduction-to-the-stock-market&category=29
[6/4/12]
26 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=8%2F31%2F11&x=0&y=0
[8/31/12]
26 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=8%2F31%2F11&x=0&y=0
[8/31/12]
26 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=8%2F31%2F11&x=0&y=0
[8/31/12]
26 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=8%2F30%2F02&x=0&y=0
[8/31/12]
26 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=8%2F30%2F02&x=0&y=0
[8/31/12]
26 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=8%2F30%2F02&x=0&y=0
[8/31/12]
27 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield
[8/31/12]
27 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll
[8/31/12]
28 - treasurydirect.gov/instit/annceresult/press/preanre/2002/ofm71002.pdf
[7/10/02]
