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Monthly Market Update - August 2014

September 17, 2014
Summary

Markets bounce back! After declining in July the S&P 500 got back on the right track in August, boasting a +4.0% return and breaking through the symbolic 2,000 level. The rally was supported by an upward revision of reported GDP, increased consumer confidence, and eased geopolitical concerns. The Fed continued to wind down its bond buying and is on track to end the program in October. U.S. small stocks finally saw some life and outperformed U.S. large stocks with a 5.0% gain. Developed international stocks were flat for the month, but emerging markets returned a respectable 2.3%. Fixed income securities did well as yields fell and bond prices rose. The Barclays U.S. Intermediate Government/ Credit Bond Index was up 0.7% and international bonds (JPM GBI Global Ex US Hedged Index) gained 1.5%. On the alternatives side, REITs advanced 2.5% and commodities declined 1.0%.

Economy

  • The second estimate of second quarter U.S. real GDP growth came in at 4.2%. The rebound was expected after the abysmal first-quarter decline of 2.1%. This keeps the U.S. economy on track with slow but steady growth on average.
  • Inflation (CPI) for the month of July increased just 0.1%, held down by cheaper gasoline prices. Year-over-year inflation dropped to 2.0%, in line with the Federal Reserve’s long-term inflation target.
  • Housing starts rose sharply from the month prior to an annual level of 1.1 million. This pace is back inside 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.
  • Consumer confidence continued to climb. The index rose to 92.4, its highest point since late 2007.
  • The unemployment rate ticked down to 6.1%. Employers added 142,000 jobs during the month, well below consensus forecasts of 225,000. The labor force participation rate remained virtually unchanged.

U.S. Equity

  • The S&P 500 Index rose 4.0% for the month. All sectors posted gains except for telecommunications, which declined 1.0%. U.S. small stocks rebounded, with the Russell 2000 Index up 5.0% for the month. This brings the index back into positive territory for the year.
  • Corporate earnings for the second quarter were up 10% on a year-over-year basis – the best since third quarter 2011.

International Equity

  • Developed international stocks (MSCI EAFE Index) were relatively flat for the month, with the index declining 0.2%. International small stocks posted a small gain of 0.5%.
  • Emerging market stocks (MSCI Emerging Markets Index) rose 2.3% for the month. Russia fell 1.5%, now down 14.5% so far this year, but Brazil had a great month, rising 11.1%. Year-to-date, emerging markets have gained 10.6%, outperforming U.S. and developed international stocks.

Fixed Income

  • The 10-year Treasury yield fell to 2.42%, down 10 basis points from the month prior. The Fed continued their path of tapering bond purchases in August by reducing the monthly amount by $10 billion as planned. Monthly bond purchases now stand at approximately $15 billion, and the program is still on pace to end in October.
  • The Barclays U.S. Intermediate Government/Credit Bond Index gained 0.7% as interest rates fell. International bonds (JPM GBI Global Ex US Hedged Index) gained 1.5%, and TIPS performed modestly with a 0.4% gain.

Alternatives

  • Commodities (Bloomberg Commodity Index), which had strong performance early in the year, fell 1.0% in August. Livestock was the biggest drag on the index, down 4.2%.
  • The S&P Global REIT Index continued its streak of posting gains every month so far this year. The index is now up a whopping 19.1% year-to-date after a strong gain of 2.5% this month.
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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