Monthly Market Update for August 2015

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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.

Global Economy:

Second quarter growth was stronger than first reported on larger gains in consumer and business spending and a buildup of inventories.  Inventory accumulation is typically a sign that companies have confidence in their outlooks for business activity.  Gross domestic product rose at a 3.7% annualized rate, up from the 2.3% estimate that the Commerce Department reported last month.  The biggest driver of the upward revision was larger gains in business investment, including an 8.6% advance in spending on intellectual property and an 80% rise in residential investment.  Government spending increased at a 2.6% pace, the most in five years.

US employers added 173,000 jobs in August, resulting in average monthly gains of 212,000 this year.  Continued payroll additions suggest employers remain upbeat about their prospects.  The US employment rate dropped to 5.1%, the lowest since April 2008, and a level the Federal Reserve has deemed near full employment.  Average hourly earnings increased 0.3% from the prior month and 2.2% over the past year.

A gauge that measures US manufacturing activity dropped to a two-year low of 51.1 in August, from 52.7 in July, reflecting the ongoing impact of a stronger US dollar reducing the competiveness of US exports across the globe.  In contrast, growth in the larger US service industries stayed close to the highest level in nearly 10 years.  Orders, output and employment in service companies, which account for nearly 90% of the US economy, advanced at a faster rate in August than the average for the first seven months of the year.

Japan’s economy contracted at a 1.2% annualized rate in the second quarter as domestic demand was essentially flat due to sluggish wage growth.  In a surprise move, China weakened its currency, the renminbi, by nearly 4% versus the US dollar as officials reiterated a pledge to give the global market a bigger role in setting the exchange rate.  But, analysts also viewed the weaker currency as an attempt to bolster a slowing economy after exports contracted 8% in July.

Global Markets:

Worries over Chinese economic growth produced significant volatility across US markets as the S&P 500 index dropped 6% in August, the worst monthly showing since a similar decline in May 2012.  Still, the decline was well off the intra month low of 11% (set August 25).  All ten sectors of the index lost ground led by healthcare stocks, down 8%, as investors took profits after previous gains.  Consumer discretionary companies declined 6.6%, but closed with the top year to date return of 3.7%.  Energy companies dropped 4.7% despite the strong rise in oil prices.  Breadth was negative with only 60 issues of the index posting gains, compared with 292 gainers in July.  Small cap stocks suffered broad losses as the Russell 2000 index dropped 6.3%.

Global equities declined by more than $3 trillion in August after China’s surprise currency devaluation raised concerns other countries may follow suit to defend their economic prosperity.  The MSCI All Country World index lost nearly 7.0%.  European stocks posted their worst month in four years, as investors weighed the economic impact on the euro region of slower Chinese growth.  The Stoxx Europe 600 index closed August with a loss of 8.5% (-6.8% USD), the largest drop since August 2011.  Shares in Japan dropped 8.2% (-6.2% USD).

Chinese equities dropped significantly in August amid worries the economy may not reach the government’s 7% growth target for 2015, prompting the sudden currency devaluation in an effort to prop up economic activity.  The Chinese benchmark Shanghai Composite index slid 12.5% (-14.9% USD).  The broad MSCI Emerging Markets index registered steep negative returns with Latin American equities encountering the sharpest drawbacks.  These stocks were hurt by lower commodity prices and weak currencies.  Brazilian stocks fell after government reports showed a deepening economic downturn and a second quarter GDP contraction of 2.6%.

Crude oil rose over 20.0% in the final days of trading.  Reports showed US output decreased and OPEC disclosed that it is ready to discuss fair value pricing among members.  Ultimately, oil finished the month up 4.4% at $49.20 per barrel.

The pronounced equity market volatility bled into bond markets in August, leading riskier bonds to underperform.  US Treasuries were a safe haven bid resulting in a drop in 10-year Treasury yields to a low of 1.9% on August 24.  Ultimately, a month end rally in oil prices stoked inflation worries and sent yields higher to close at 2.22%, a gain of only 4 basis points (bps) from July.  US two-year Treasury yields, among the most sensitive to changes in Federal Reserve (Fed) interest rate policy, rose in August for the fifth straight month, to close at 0.74%, up 8 bps.  Despite the equity market volatility, some investors continued to believe the Fed could hike rates in September.  According to data compiled by Bloomberg, as of August 31st, investors placed a 38% chance of a Fed move in September.

In US corporate bond markets, the investment grade Barclay’s US Corporate Bond index declined 0.59%, as average yields rose to 3.49%, from 3.36% at the end of July.  US high yield bonds underperformed, with the Barclay’s US High Yield Bond index posting a loss of 1.70% in August.  Although high yield losses were widespread across sectors, the energy segment dropped 7% during the month.  The index’s yield spread to 10-year Treasuries rose to 505 bps from 467 bps the prior month.  During the month, yields rose to 7.56%, the highest since June 2012 and closed at 7.26%, a 39 bps jump from July 31.

Annual inflation in the euro region stayed at 0.2% in August, matching the rate of the previous two months, as tame inflation helped drive Germany’s 10-year bond yield to a monthly low of 0.56%, before rebounding to 0.80%, a rise of 15 bps from July.  China’s central bank cut interest rates after data indicated the manufacturing sector was decelerating at a quicker pace than forecast.  An index measuring the country’s manufacturing index fell to 49.7, below the threshold of 50 which denotes expansion.  The Peoples Bank of China reduced its benchmark lending rate by 25 bps to 4.60%, its fifth rate cut since November 2014 that has dropped rates 140 bps from 6.0%.


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. HighTower/GFP 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. Securities are offered through HighTower Securities, LLC, member FINRA/SIPC/MSRB. HighTower Advisors, LLC is a SEC registered investment adviser.

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