August 2018 Market Update

Published on September 20, 2018 | Posted in Tips & Updates

Stock prices continued their ascent; setting records across multiple benchmark indexes in August. The S&P 500 added another 3.03% (+8.52% YTD) and the Dow Jones Industrial Average rose 2.16% (+5.04% YTD.) Stocks were fueled by strong employment, positive economic growth, and modest inflation. All of which reflect favorably and have contributed to rising consumer confidence. This overshadowed ongoing uncertainty surrounding global trade wars. Technology stocks continue to outperform, causing the NASDAQ index to rise 5.71% which added to an impressive 17.47% rise so far this year. Global stocks remain the lone index in the red, with the Global Dow off 0.52% this month and YTD performance of -0.32%.

The labor market reports for August are due out later this week, but strong July data remains on the mind of investors. July saw the creation of 157,000 payroll jobs and a dip in the unemployment rate to 3.9%. Average hourly earnings also rose last month, up 2.7% on a year-over-year basis. The consensus estimate for August’s job creation number is 200,000. Analysts also project another decrease in the unemployment rate to 3.80%. Additional positive news came as second quarter GDP showed the economy grew at an annualized rate of 4.20%. The Bureau of Economic Analysis reported that consumer spending increased by an impressive 3.8% after only rising 0.5% in the first quarter. Another metric for inflation, core personal consumption expenditures (PCE) rose 2.1% since July 2017; the fastest annual clip since 2012. Core PCE is worth paying special attention to as it is the preferred measure of inflation by the Federal Open Market Committee as they chart a course for future interest rate hikes.

Interest rates actually slipped in August, with the 10-year US Treasury down 11 basis points to 2.85%. The Federal Reserve met in early August and kept the fed funds rate steady at a range of 1.75%-2.00%. Fed watchers noted that the language chosen in the minutes of the August meeting did not suggest any reason to doubt the market’s expectation of the FOMC to implement two more 25 basis point rate increases before the end of 2018. Odds of a rate hike in September are now over 96%. In general, the yield curve continues to flatten. The difference between yield on a 1 month US Treasury Bill and a 30 year US Treasury Bond is a mere 1.08% and the 2 and 10 year maturities only differ by 19 basis points. It’s clear that rising interest rates are having a more pronounced impact on short term bonds than on longer maturities. As such, the sweet spot for fixed income investor’s remains in the 2-5 year timeframe where 3.00% brokered CDs top the offering sheets.

September will likely prove to be an important month and could set the course for the remainder of the year in the financial markets. Between the FOMC meeting, rising inflation, and upcoming corporate earnings reports there are a number of factors that could push markets in either direction. We expect favorable conditions to continue, but do not anticipate stocks to continue to rise at such an elevated rate. This test of the strength of 2018’s bull market will be interesting to watch closely. If you have questions about what any of these factors might mean to your financial picture, please contact one of our investment professionals today. Thank you for choosing us for your financial services needs.