August Market Commentary

Market Commentary

US stocks surged to new record highs in August on great corporate earnings and reassuring comments from the Fed. With nearly all S&P 500 companies reporting earnings to date, 88% have beaten analyst forecasts and earnings have risen 95% from a year earlier. Economic news was positive over the month despite the growing COVID infection rates brought on by the Delta variant. Job growth continued to improve in July with 943,000 jobs added, the largest number in 11 months, and June’s hiring number was revised higher. The unemployment rate fell to 5.4% from 5.9% despite more workers looking for employment. Manufacturing and service sector activity remained strong in July. Retail sales fell 1.1% and small business confidence fell to its lowest level since the early spring over concerns of the impact the Delta variant might have on business. CPI rose 5.4% from a year ago in July in line with estimates. However, it only rose 0.5% in July over June compared to June’s 0.9% monthly increase. Home prices have continued to climb on low inventory as they have gained 18% from a year ago. Second quarter GDP growth was revised up to 6.6% from 6.5%.

Foreign stocks posted gains over the month despite the spread of the Delta variant on solid earnings and economic news. Second quarter earnings for European companies are expected to soar 152% from a year ago and revenue results have well outpaced analyst estimates. Eurozone manufacturing and service sector activity increased in July, but at a slower pace. The Bank of England kept its benchmark interest rate and bond buying program steady and may begin to unwind its bond buying program earlier than planned if the economy continues to improve. Recent economic readings in China have disappointed with growth in industrial, consumer, and investment activity slowing in July more than expected. In addition, China’s service sector activity fell into correction territory in August for the first time since February 2020. The reading fell well short of expectations. Despite the weak economic numbers in China, emerging markets topped developed markets over the month, but have heavily trailed over the year to date.

Bonds edged down in August as interest rates ticked higher driven by Fed comments. In a highly anticipated speech, Fed Chair Powell said he expected to begin reducing the Fed’s bond purchase program later this year and expected that the current surge in inflation will abate over time. He stressed the Fed shouldn’t overreact to the recent jump in prices. Minutes from the Fed’s July meeting echoed these sentiments. The 10-year Treasury yield rose over the month for the first time since March, settling at 1.31% after starting the month at 1.24%. Performance was mixed across sectors, but lower credit quality issues led the way. Shorter term bonds topped longer term bonds in August and over the year to date.