US stocks fell in August as comments from Fed officials showed the Fed planned to continue to be aggressive with fed funds rate increases to reduce inflation “until they are confident the job is done.” Earnings for S&P 500 companies continue to be strong. As of the end of August, 99% of S&P 500 companies posted earnings and 75% of those companies reported earnings above estimates, although many have issued lowered forward guidance. Economic news was positive over the month. Job growth continues to be strong, with US employers adding 528,000 jobs in July, more than doubling the estimated 258,000 economists had forecasted. The unemployment rate fell to 3.5%, just under the 3.6% estimated. The producer-price index increased by 9.8% annually in July, much lower than the 11.3% increase in June and the smallest annual rise since October 2021. CPI increased by 8.5% in July, below the expected 8.7%, and lower than the 9.1% increase in June. The personal consumption expenditures index, the inflation gauge the Fed prefers, was up 6.3% in July from a year earlier below the 6.8% increase in June. US manufacturing activity grew in July. While July marked the 26th consecutive month of growth, the pace of growth continues to slow and remains at the lowest levels since June 2020. Sales of existing homes in the US fell for the sixth straight month in July, the longest streak of declines in over eight years, as higher mortgage rates continue to cool the housing market.
Foreign stocks also declined in August as aggressive foreign Central Bank interest rate increases and contracting economies put pressure on foreign markets. The Bank of England raised its key interest rate by 0.50%, the largest increase in 25 years, and predicted the UK would fall into a recession this year. The U.K. economy contracted in the second quarter. Gross domestic product fell 0.1%, slightly better than the 0.2% decrease economists expected, but lower than the 0.8% increase in the first quarter. The U.K.’s annual inflation rate hit 10.1% in July up from 9.4% in June. European Central Bank (ECB) officials set the stage for another big hike at their September meeting, likely repeating the 0.5% increase from the previous meeting with the possibility of an even larger move as inflation is at record highs. The eurozone’s headline inflation rate hit 9.1% in August, higher than the 9% expected. In response to data showing economic activity slowed across the board in July, China unexpectedly cut two key interest rates. Oil prices continued to fall, down 9.2% for the month, ending August at $89.55 per barrel. Emerging markets outpaced developed markets in August and the year to date, while developed markets led the way over the trailing year.
Interest rates increased in August driving bond prices sharply lower as the bond market continues to focus on the future paths of the world’s central banks. Fed Chair Powell pointed out during his speech at Jackson Hole that the actions taken to bring down inflation will also likely bring some pain to households and businesses. He stated that while these impacts are unfortunate, failure to restore price stability would lead to far greater pain. Minutes from the July Federal Reserve meeting indicated they likely would not consider pulling back on interest rate hikes until inflation came down substantially. The yield on the 10-year Treasury spiked in August ending at 3.13% up from 2.64% at the end of July. The rate for a 30-year fixed-rate mortgage increased to 5.55% up from just below 5% in July. US Agency bonds were the top performer for August and the year to date and shorter term bonds outpaced longer term bonds for August and the year to date.
|Index Performance||August||Year to Date||Trailing 12 Months|
|US Stocks (Russell 3000)||-3.73%||-16.92%||-13.28%|
|Foreign Stocks (FTSE AW ex US)||-3.02%||-17.67%||-18.72%|
|US Bond Mkt. (BBgBarc Int. Gov/Cred)||-2.00%||-7.14%||-8.20%|
|Municipal Bonds (BBgBarc 1-10 Yr Muni)||-1.49%||-4.82%||-5.16%|
|Cash (ICE BofA ML 3-Mo T-Bill)||0.16%||0.36%||0.37%|