August Monthly Market Commentary

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

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
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

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

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

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 

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).

“Happy people always look for opportunities where others are seeing crisis.” – Deepak Chopra

To Your Prosperity,

Kevin Kroskey
This article prepared in conjunction with Peter Montoya.
1 - [8/31/12]
2 - [8/31/12]
3 - [8/30/12]
4 - [8/17/12]
5 - [9/4/12]
6 - [8/3/12]
7 - [8/24/12]
8 - [8/15/12]
9 - [8/14/12]
10 - [8/31/12]
11 - [8/31/12]
12 - [9/3/12]
13 - [8/29/12]
14 - [9/3/12]
15 - [8/31/12]
16 - [9/4/12]
17 - [7/20/12]
18 - [9/3/12]
19 - [8/31/12]
20 - [8/31/12]
21 - [8/22/12]
22 - [8/23/12]
23 - [8/29/12]
24 - [8/31/12]
25 - [6/4/12]
26 - [8/31/12]
26 - [8/31/12]
26 - [8/31/12]
26 - [8/31/12]
26 - [8/31/12]
26 - [8/31/12]
27 - [8/31/12]
27 - [8/31/12]
28 - [7/10/02]

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