Please find the next blog in our monthly series that provides timely market data as well as perspectives on the current state of the economy and the global financial markets.
Economic data for August helped to confirm that global synchronized growth has faded, with the divergence favoring the US over international economies. Trade relations with China remain tense, even as apparent progress was made with Mexico (thus far not Canada) to negotiate a more modernized NAFTA agreement.
Comments made by Federal Reserve Chair Powell at the annual Jackson Hole symposium highlighted the constructive outlook for the US economy but noted the difficulty in determining the neutral level for rates. This was perceived as a “dovish” tone and a signal for a continued gradual increase in rates. Core PCE reached the Fed’s target of 2.0% for the first time in six years and consumer confidence hit cycle highs as leading indicators continued to trend higher.
The second estimate of 2Q-18 GDP resulted in a modest revision higher, to an annualized rate of 4.2%. Business investment and net exports contributed more positively, even as consumer spending (roughly 2/3 of the total economy) was adjusted downward. The consensus forecast for 3Q-18 remains anchored around 3%.
The unemployment rate was unchanged at 3.9% in August despite employers adding 201,000 new jobs. The labor force participation rate declined modestly to 62.7%. Although average hourly wages continued to rise, with a year-over-year increase of 2.9%, real wage gains remain subdued as inflation has increased.
The emerging market economies continue to be under various levels of stress. The JP Morgan EM Currency Index has been in decline since mid-February. These currency pressures have resulted in significant headwinds to countries (notably Turkey and Argentina) and companies with US dollar denominated debt. Broadly, manufacturing PMI indicators are now foreshadowing slower growth. The People’s Bank of China is attempting to offset trade tensions with policy to support the local currency.
Global equities were positive in August, but performance varied by geography, style, and sector. The major domestic benchmarks were all up for the month, with the S&P 500 establishing all-time highs amid corporate earnings strength. Large cap US stocks finished +3.3% in August, with year-to-date returns approaching double-digits. IT (+6.7%) and Consumer Discretionary (+5.0%) were particularly strong with Energy (-3.8%) lagging other key sectors.
Small cap stocks rallied once again in August, with the Russell 2000 advancing +4.3% for the month. This category is considered to be sheltered from global trade tensions and is now up an impressive +14.3% for the year. Continuing a trend observed across the equity categories, small cap growth outpaced value by nearly 400 bps.
In the broad international developed markets, the MSCI EAFE index was down -1.9% in August, and moved back into negative territory for 2018. Overall, the US dollar strengthened modestly versus developed currencies.
The MSCI Emerging Markets index gave back the prior month’s gain, with the loss of -2.7% resuming the pattern that has defined most of 2018. The category is now down -6.9% year-to-date, mostly attributable to local currency weakness versus the US dollar, which dampens returns for US-based investors.
Real estate, as measured by the FTSE EPRA/NAREIT Developed index, was up +1.0% during the month. Oil came back somewhat in August given supportive supply data, with the NYMEX contract up +1.5%. The Alerian MLP index continued its impressive 3Q-18 run, advancing another +1.6%. The broadly diversified Bloomberg Commodity index had another poor month, dropping -1.8% and retreating further into negative territory for the year.
US Treasury (UST) yields fell modestly in August, reflecting the impact of global risk aversion despite robust domestic economic signals. The curve flattened for the eleventh time in the past 12-months, perhaps implying skepticism over the prospects for future growth. The overall UST complex was up +0.8% for the month. Despite briefly exceeding the psychologically relevant 3% level, the benchmark 10-year UST yield ended the month 10 bps lower at 2.86%. The Federal Open Market Committee (FOMC) is expected to raise interest rates by 25 bps at its late-September meeting. Although the futures market is discounting overly aggressive policy normalization, the probability of a second hike in December is still priced at approximately 65%.
Total returns for the Bloombar US Aggregate Bond index were up 0.6% during August, but year-to-date results remain down -1.0%. Contrary to the rosy response in US equities, IG corporates were an underperforming sub-sector, as credit spreads widened by 5 bps and offset much of the decline in underlying base-rates. An above average share of this weakness came at the long end of the curve. The traditional benchmark ended the month with an all-in yield of 3.3%.
The Bloombar 1-15-Year Municipal index returned +0.2%, as tax-exempt issues underperformed their taxable counterparts. The municipal curve remains relatively steep, and a little give-back from shorter-dated maturities was in order. Credit risk in BBB-rated issues (e.g. IL & NJ) continues to be rewarded as investors stretch for incremental income.
The Bloombar US Corporate High Yield index advanced +0.7% in August and is now solidly positive for 2018. The benchmark’s overall spread was essentially flat, despite CCC-rated issues experiencing notable weakness. Unhedged international government bonds were negative, with developed market issues impacted by Italian debt concerns. Local currency emerging market debt was hit especially hard (-6.1%), with the entire category resuming year-to-date losses.
Disclaimers: The data contained in this report is provided from Asset Consulting Group (ACG). This is not an offer to buy or sell securities. No investment process is free of risk and there is no guarantee that the investment process described herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. In preparing these materials, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public and internal sources. Gryphon Financial Partners shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This was created for informational purposes only. Gryphon Financial Partners, LLC is a Registered Investment Adviser.