Market Commentary
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August 2008— Monthly Market Recap |
Posted September 8, 2008 |
Stocks rise, spurred by falling energy prices
Domestic stock indices escaped their summer doldrums in August, riding the updraft from declining oil prices to post modest gains for the month. An upward revision to second quarter gross domestic product (GDP) also provided markets with a powerful dose of good news toward month-end. While stocks reversed their previous downward trend, pessimism surrounding the long-term viability of mortgage giants Fannie Mae and Freddie Mac dominated the headlines mid-month, and inflation concerns proved stubbornly persistent, leaving the Federal Reserve (the Fed) in standby mode for now. In all, the U.S. economy resembles a thoroughbred on a muddy track—still forging ahead but struggling to build much momentum.
U.S. stocks outperform
Benefiting from the sharp decline in oil prices—crude oil finished the month at $114.80 per barrel, dropping a sharp 21 percent from its highest daily close of $145.15 per barrel on July 3—U.S. stocks in August ended their streak of consecutive down months in June and July. The Dow Jones Industrial Average and the Nasdaq Composite Index each finished higher by 1.81 percent, while the S&P 500 Index gained 1.45 percent for the month. Small-cap and value stocks were in the markets sweet spot last month, as evidenced by the 4.75-percent gain for the small-cap Russell 2000 Value Index.
International investments, on the other hand, took it on the chin in August—hurt by both continued concerns about U.S. conditions rippling into a global economic slump and a strengthening U.S. dollar, which negatively impacts the return to U.S. investors holding foreign investments. For example, the MSCI EAFE Index of developed economies rose 0.77 percent in local currency terms but lost 4.29 percent after currency effects. Similarly, the MSCI Emerging Markets Index fell by 8.22 percent in U.S. dollar terms, though it lost only 5.07 percent in local terms.
Economic bright spots
Some key economic news provided a boost to stock markets in August, most notably that the second quarter GDP was revised higher to a 3.3-percent annualized rate, from an initial estimate of 1.9 percent. The surprise jump in GDP was largely attributed to the spending of economic stimulus payments, as well as to an increase in net exports to foreign trade partners. A durable goods report from the U.S. Department of Commerce added to the enthusiasm, as spending on big-ticket items rose by a healthier-than-expected 1.3 percent in July. Consumer sentiment also edged higher in August—after reaching a 28-year low in June—indicating that consumers are starting to feel less gloomy. The survey also indicated, however, that the future spending plans of consumers are tepid at best and may point toward further weakness later in the year. That, as well as inflation running at a stubbornly high rate (above the Feds comfort level), raises fears that the stronger economic data from Q2 may be short-lived.
Are Fannie and Freddie next?
With sluggish sales activity and falling prices still weighing on the domestic housing market, speculation about the fates of mortgage giants Fannie Mae and Freddie Mac reached a fever pitch in August. The mortgage giants each need to raise fresh capital to offset mortgage-related losses on their books, and continued declines in housing prices will only exacerbate the problem. But it is unclear whether private investors will be willing to step to the plate, which raises the probability of governmental intervention down the road.
- John Blood, CFA, Chief Market Strategist, Commonwealth Financial Network
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Disclosure:
Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The Nasdaq Composite Index measures all Nasdaq domestic and non-U.S.-based common stocks listed on the Nasdaq Stock Market. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Russell 2000® Value Index measures the performance of Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. |
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