August Market Commentary

US stocks hit record levels in August led by robust corporate earnings, positive trade news and solid economic news.  US corporations posted a 16.1% gain in profits in the second quarter from the prior year, the largest gain in six years.  Apple became the first company worth $1 trillion in market value.  At the end of the month the US and Mexico reached an agreement on a revision to the North American Free Trade Agreement while Canada and the US remained in negotiations.  US and China threated additional tariffs on each other during the month before agreeing to go back to the negotiating table.  In positive economic news, employers added 157,000 new hires, below expectations, but previous months were revised higher by 59,000 and the unemployment rate dropped to 3.9%.  US retail sales rose 0.5% in July well ahead of expectations, US factory output rose 0.3% and 2Q US Gross Domestic Product was revised up to 4.2% from 4.1%.  On the downside, US auto sales fell 3.7%, the Consumer Price Index rose 2.9% over the past year more than covering wage gains, and home sales fell 0.7% in July for fourth straight month of declines.  For the month, US stocks gained 3.51%, bringing their year to date gain to 10.39%.

Foreign stocks sank over the month on concerns over emerging market countries.  Emerging markets sank as the currencies of Turkey and Argentina plunged.  Worries arose that the countries would not be able to repay their debts and their troubles could ripple across emerging markets.  Concerns about European banks’ exposures to the countries have dragged down stock prices as well as concern over the future direction of Italy.  Of the European companies to report earnings to date, only approximately half topped profit estimates from analysts.  Developed markets outpaced emerging markets for the month and year to date.  International stocks fell 2.04% in August and are now down 3.26% for the year.

Bonds rose over the month as investors moved to safe haven assets on concerns about global trade and weakness from emerging markets.  At the conclusion of their meeting, the Federal Reserve left the Fed Funds rate as is although they expect to raise the Fed Funds rate a quarter percent at their September meeting.  Also, they continued to indicate the economy was performing well, but there was debate over how protectionist trade policies would impact the economy.  The Bank of England raised its benchmark interest rate a quarter percent to 0.75%, its highest level since 2009 in order to combat inflation.  The 10-year Treasury yield fell over the month to finish at 2.85% down from 2.96% to start August.  For the month, longer-term bonds outpaced shorter-term bonds, with US government bonds the top performing sector.  The broad bond market gained 0.64% in August reducing the year to date decline to 0.96%.