From our Investment Department:
U.S. and foreign equity markets declined modestly in August following a strong performance in the prior month. The broad U.S. market was 2.9 percent lower at the close of August. Non-U.S. equities declined by approximately 1.4 percent. Bonds, which had seen significant price declines in May and June, were only modestly lower in August as the ten-year Treasury yield increased from 2.60 to 2.78 percent. The Barclays U.S. Aggregate Bond index registered a negative 0.51 percent return for August while TIPS and municipals showed somewhat larger declines.
The mixed market performance of this period reflects a number of factors which have been present in investors’ minds for some time. First, the surge in U.S. Treasury bond yields in May and June had been expected to occur at some point, but not necessarily in such a brief span of time. Ongoing speculation surrounding tapering of bond purchases by the Federal Reserve remains a significant factor. Economic fundamentals may well limit similar surges in the foreseeable future as the drivers of major rate increases (sustainable inflationary forces) are not evident in the current environment.
Stocks, meantime, are poised for further advances driven by earnings growth. Corporate profits grew at a 16.4 percent annualized rate in the second quarter and are up 5 percent from a year ago. Real GDP growth for Q2 was revised up to an annualized 2.5 percent from 1.7 percent. ISM data on manufacturing and the services sector show a continuing acceleration in economic activity. The ongoing recovery, however, is not entirely uniform as is shown by occasional conflicting data, the most recent being a generally lackluster report on payroll employment.
In sum, we find nothing surprising in the latest data releases and in the overall market landscape. What we see here is a gradually normalizing bond market, a solidly recovering stock market, and an economy that, after the most severe downturn since the 1930s, is making its way back to a state of efficient, profitable stability.