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Monthly Market Update - July 2014

August 18, 2014

Summary

July somewhat humbled investors as the S&P 500 experienced its first monthly decline since January. On the U.S. economic front, data was favorable as inflation remained near the Fed’s target rate of 2%. The Fed continued to wind down their bond buying program and second quarter real GDP came in higher than expected at 4%. Furthermore, consumer confidence rose substantially and sits at its highest point since late 2007. Global stock markets declined 1.5%, as measured by the MSCI All Country World Stock Index, reflecting ongoing international concerns with Russia and the Argentina debt crisis. U.S. small stocks fared worst among major asset classes, down 6.1%, bringing them into negative territory year-to-date. International developed stocks were down 2.0%, but emerging markets surged 1.9% with strong gains in China and Indonesia. Fixed income returns overall were minimal, but international bonds gained 0.6%. Commodities disappointed investors with a -5.0% return, and REITs cooled off after strong gains year-to-date and were near flat for the month.

Economy

  • The first estimate of second quarter U.S. real GDP growth came in at 4.0%. The rebound was expected after the abysmal first-quarter decline of -2.1%. This puts the U.S. economy back on track with slow but steady growth.
  • Inflation (CPI) for the month of June increased 0.3%. The year-over-year inflation rate held steady at 2.1%, in line with the Federal Reserve’s long-term inflation target of 2.0%.
  • Housing starts fell from the month prior to an annual level of 893,000. This pace is outside the range of the estimated 1.0 to 1.5 million needed to keep the housing market on pace with population growth and replacement housing. Home prices remain solid as new and existing home prices rose 5.3% and 4.5% respectively from one year ago.
  • Consumer confidence rose sharply to 90.9, up from 86.4 the month prior. The index is at its highest point since late 2007.
  • The unemployment rate ticked up slightly to 6.2%. Employers added 209,000 jobs during the month, slightly below consensus forecasts of 233,000.

U.S. Equity

  • The S&P 500 Index fell 1.4% for the month, with the decline led by the utilities and industrials sectors. This was the first monthly decline for the S&P 500 since January. U.S. small stocks fared the worst among major asset classes, with the Russell 2000 Index tumbling 6.1% taking its return into negative territory for the year.
  • Corporate earnings for the second quarter (93% complete) are up 10% on a year-over-year basis – the best since third quarter 2011. It was also the first time since that period that all 10 sectors posted positive earnings growth.

International Equity

  • Developed international stocks (MSCI EAFE Index) were not exempt from the broad-based decline. The index fell 2.0%, while international small cap stocks fell 2.4%.
  • Emerging market stocks (MSCI Emerging Markets Index) rose 1.9% for the month. Russia continued to plummet, down 8.4% for the month, but those losses were off set by 8.2% gains in both China and Indonesia. Year-to-date, emerging market stocks have surpassed all other stock market segments.

Fixed Income

  • The 10-year Treasury yield fell to 2.52%, down 6 basis points from the month prior. The Fed continued their path of tapering bond purchases in July by reducing the monthly amount by $10 billion as planned. Monthly bond purchases now stand at approximately $25 billion.
  • The Barclays U.S. Intermediate Government/Credit Bond Index fell 0.2%, while international bonds (JPM GBI Global Ex US Hedged Index) gained 0.6%. TIPS were flat for the month.

Alternatives

  • Commodities (DJ UBS Commodity Index), which had performed strong early in the year, dropped 5.0% for the month. Grains and energy were the biggest drags on the index, down 10.6% and 7.8% respectively.
  • The S&P Global REIT Index held steady, returning just 0.1%, but continued its streak of posting gains every month so far this year. The index is now up 16.3% year-to-date, outperforming every other major asset class.

Sources: Bureau of Economic Analysis (BEA), Federal Reserve, Institute for Supply Management, JP Morgan, Morningstar, Standard and Poor’s, Wells Fargo, Yahoo! Finance, BofA Merrill Lynch

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