Sara J. Walker, CFA, Senior Vice President and Portfolio Management Team Leader with the Milwaukee office of Associated Trust Company, is known for her in-depth analysis of current market trends and objective outlook for the economy. Her informative points are derived through thorough economic research and highlighted in her monthly discussions and quarterly newsletter, the Economic and Investment Environment. Below are her highlights for August and early September:
• Investors put their beach towels away early and went back to market in August! The S&P 500 index ended the month with a total return of +2.25%, and the NASDAQ composite gained a fireworks-worthy +4.55%. This glass half-full optimism further strengthened with gains of +4.31% and +3.86% in the S&P 500 and NASDAQ, respectively, during the first fifteen days of September.
• Foreign investments also drew plenty of support. The Morgan Stanley EAFE (Europe, Australasia and the Far East) index gained +2.70% in August and +6.74% for the first half of September. Emerging markets such as Brazil, Russia, India and China lagged in August with only a +0.41% return. The first half of September was much more friendly, however, with a +7.87% return.
• Small company stocks, which have lagged large company stocks all year, also joined in the fun. The Russell 2000 index gained +3.33% in August and +6.48% in the first half of September.
• As investors turned their attention to risk-based assets, the bond market lost some of its allure. In August, the Barclays Government/Credit index of U.S. government and corporate notes gained +0.02%. This index declined -1.04% from August 31st to September 15th.
• Global central bankers were largely responsible for this attitudinal shift toward risk. Hints of continued easy money were falling like aspen leaves in September at the annual Jackson Hole summit of bankers and economists in late August. Then, on September 6th, European Central Bank President Mario Draghi defied Germany and launched an “unlimited” bond buying program to boost shaky peripheral European bond markets and banks. His “Outright Monetary Transactions” program (OMT) became the latest in a series of attempts to keep the euro-zone together.
• On September 13th, stock markets received a further boost from U.S. Federal Reserve Chairman Ben Bernanke. He decisively announced an aggressive third phase of Quantitative Easing (QE3) to the tune of $40 billion per month with no end date in sight. This third round of purchases of long duration assets was expanded to include mortgage-backed securities. Additionally, the Fed announced the continuation of Operation Twist where it replaces maturing short-term debt on its balance sheet with long-term debt. Furthermore, Chairman Ben extended the “near-zero” federal funds rate policy to mid-2015 from 2014.
• The main driver of the Fed’s decision was the lackluster employment report for August. On September 7th, the Bureau of Labor Statistics reported only +96,000 jobs were created in August, which was lower than expected and a drop from the July pace of +141,000. In a sign of increasing discouragement, 368,000 Americans left the work force. At +1.7%, average hourly wage growth matched the pace of growth in July, which was the lowest rate of growth on record.
• Encouragingly, the U.S. housing market showed more signs of life in August and early September. The National Association of Home Builders (NAHB) index improved for the fifth month in a row to its highest level in over six years. Existing home sales were reported at +9% compared to year-ago levels and were growing at the fastest pace since early 2010. Home affordability (a combination of mortgage rates and home prices) remained at record levels.