ON THE HOMEFRONT
Historically, August has been a volatile month for financial markets. While this August provided headline volatility, the equity markets proved enormously resilient facing multiple threats including; increasing tensions between the U.S. and North Korea over nuclear weapons, chaos in President Trump’s administration, and a devastating hurricane to the fourth largest city in U.S. and 30% of the nation’s oil output. U.S. equities were mixed, ending on a high note for the month. The S&P 500 rose 0.31%, and the NASDAQ Composite gained 1.27%. Small and mid-cap stocks underperformed, and growth continues to outperform value. The Chicago Board Options Exchange (CBOE) Volatility Index experienced a mid-month spike from 10 to 16, spooking investors, but retreated by month closing near 10.50.
Top CEOs disbanded two business councils created by the White House; a move they said was protesting Donald Trump’s failure to sufficiently condemn racism. The move marks a dramatic break between U.S. companies and a president who has sought close ties with business. Both the Strategic and Policy Forum and manufacturing-advisory council were formed early in the President’s term to assist in implementing a broad economic plan that included lowering taxes, improving the nation’s infrastructure, stemming the flow of U.S. jobs to other countries, and reducing regulation.
President Trump’s rift with both Democrats and Republicans widened as he threatened a government shutdown over his long-promised border wall. Escalating tensions between the Republican President and the Republican Congress could endanger negotiations to overhaul the tax system in the coming weeks. The goal will be to keep the government running and avoid a default on the country’s debt. To do this, Treasury officials have said Congress must raise the borrowing limit by the end of September. Threats of a government shutdown could spook the global markets. In 2011, the U.S. came perilously close to defaulting on its debt, leading Standard & Poor’s to take away the country’s top credit rating, and subsequently, equities plunged nearly 20%.
Another quarter of improving data reinforced buying pressure in stocks and kept the pullbacks to a minimum. The U.S. economy grew faster than expected in the second quarter, posting its quickest pace in more than two years. While Gross Domestic Product (GDP) increased at a 3.0% percent annual rate in the second quarter. The report was revised upward from 2.6% pace reported last month. The Atlanta Federal Reserve GDPNow Model for real GDP growth in the third quarter is at 3.4%.
Retail sales and business spending data indicate the momentum could carry over into the third quarter. Consumer spending, which makes up approximately two-thirds of the U.S. economy, grew at a pace of 3.3%, the fastest in a year. The Core Personal Consumption Expenditures (PCE), increased at a pace of 0.9%, and last quarter’s rise was the slowest in more than two years and followed a 1.8% gain in the first quarter. Signs of improving global growth are reflected in the prices of commodities. Bullish investors are pushing the prices of copper, aluminum, and other industrial metals to multi-year highs. Gold prices continued to be buoyed by a weaker dollar after the recent global central bank meeting offered few clues about future monetary policy. The price of gold finally took out the resistance level of $1,300 and is now trading at the highest level since November.
Prices of government bonds ended the month with strong momentum. The benchmark U.S. 10-year Treasury note rate closed at 2.12%, near the lows for the year. With inflation running below the Feds’ 2%, target investors and analysts thought there was only a small chance that the Fed would raise rates for the third time this year. Additionally, as tensions re-emerged with North Korea, U.S. Treasury securities benefited in a flight to safety.
The release of the July Federal Open Market Committee (FOMC) minutes revealed doubts over sagging inflation that are causing a split among Fed officials about the timing of the next increase in interest rates. The Fed has raised short-term rates twice this year and has one more rate hike penciled in for 2017 without indicating when. The minutes also specified greater consensus around officials’ plans to begin reducing the size of their $4.5B portfolio. Most FOMC members preferred to defer that decision until the next meeting on September 19 – 20in order to gather more information.
No real news came from the much-awaited annual central bank conference in Wyoming. Federal Reserve Chair Janet Yellen did not refer to U.S. monetary policy in her speech. Investors were hoping for some signal on the Fed’s plan to reduce the balance sheet or the outlook for further interest rate increases. Instead, Ms. Yellen focused on financial reforms. Following the example of the Federal Reserve Chairwoman, European Central Bank President Mario Draghi failed to disclose the outlook for European monetary policy or economic conditions.
The international bourses performed reasonably well in-light of rising geopolitical tensions. The MSCI EAFE Index fell 0.04%, and the MSCI Emerging Market Index rose 2.33%. Countries in the shadow of North Korea’s missiles posted slight losses for the month, with the South Korean KOSPI Index sliding 1.83% and the Japanese Nikkei 225 losing 1.11%.
GDP in the Eurozone grew at an annual pace of 2.3% in the three months ending in June, a slight expansion from the first quarter. Japan’s economy grew at a faster pace of 4% in the second quarter making it the sixth straight quarter of growth. The gain gave the world’s third largest economy its longest expansion streak since 2006. The acceleration of global growth is playing an equal role with the U.S. and a positive sign for financial markets.
The market technical struggled throughout the month but ended on a strong note. The early August geopolitical risk and disorder in the White House resulted in a pickup in volatility and deterioration in both price and breadth indicators to relatively low levels. However, by month end investor sentiment turned more positive on hopes of tax cuts and de-escalating strains with North Korea. Although the technicals have improved, they are still reasonably close to levels that could lead to a reversal and warrant a close watch.
As portfolio managers return from the formal end of summer, they will be forced to confront multiple challenges. Next month Congress returns to work and faces two near-term deadlines: the debt limit must be raised by September 29, to guard against the risk of failing to pay its bills on time, and a spending bill must be approved by September 30 to avoid a government shut-down. President Trump is complicating matters by threatening to reject any bill that doesn’t include the funding toward the construction of a wall on the nation’s southern border, a move that would likely shut down the government. The Fed is likely to announce the slowing of its path to normalizing its $4.5T balance sheet at its September meeting not knowing the potential ramifications and hoping to avoid a policy error. What will be the fallout of the devastating and tragic hurricane in Houston? Moreover, we cannot ignore North Korea which could jolt us out of the current calm.
The major U.S. equity markets experienced a minor pull back in August but remain near all-time highs. Market internals are encouraging but could reverse with an increase in volatility. At Stadion, we will not attempt to predict geopolitical issues or political dynamics in Washington. What we will do, is continue to follow our disciplined investment processes and adjust portfolio allocations as risk levels increase or decrease.
Past performance is no guarantee of future results.
Investments are subject to risk, and any of Stadion’s investment strategies may lose money. The investment strategies presented are not appropriate for every investor and financial advisors should review the terms and conditions and risks involved. Stadion’s actively managed portfolios may underperform during bull markets. Some information contained herein was prepared by or obtained from sources that Stadion believes to be reliable. There is no assurance that any of the target prices or other forward-looking statements mentioned will be attained. Any market prices are only indications of market values and are subject to change.
The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market and it is highly followed in the U.S. as an indicator of the performance of stocks of technology companies and growth companies.
The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock price.
A bourse is a market organized for the purpose of buying and selling securities, commodities, options and other investments. A bourse is more commonly known as a stock exchange. The word "bourse" is based on the house, belonging to Van der Burse, where merchants would gather and trade with one another.
Federal Open Market Committee (FMOC) is the branch of the Federal Reserve Board that determines the direction of monetary policy.
The VIX is the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied volatility of S&P 500 index options. Often referred to as the fear index or the fear gauge, it represents one measure of the market's expectation of stock market volatility over the next 30-day period.
GDP is the total value of everything produced by all the people and companies in the country.
GDPNow is a nowcasting model for gross domestic product (GDP) growth that synthesizes the bridge equation approach relating GDP subcomponents to monthly source data with factor model and Bayesian vector autoregression approaches. The GDPNow model forecasts GDP growth by aggregating 13 subcomponents that make up GDP with the chain-weighting methodology used by the US Bureau of Economic Analysis.
Personal consumption expenditures (PCE), or the PCE Index, measure price changes of consumer goods and services.
The Bull Market is a market in which share prices are rising, encouraging buying.
The MSCI EAFE Index (Europe, Australasia, Far East) is an unmanaged free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada.
The MSCI Emerging Markets Index is a float-adjusted market capitalization index that consists of indices in 21 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.
Japan's Nikkei 225 Stock Average is a price-weighted index comprised of Japan's top 225 blue-chip companies on the Tokyo Stock Exchange.
South Korea’s KOSPI Index is a series of indexes that track the overall Korean Stock Exchange and its components. These indexes use a weighted average based on market calculation to calculate the value of the indexes.
The U.S. 10-Year Treasury Note is a debt obligation issued by the United States government that matures in 10 years.
Yield is the annual return on an investment, expressed as a percentage of the price. For stocks, yield is the annual dividend divided by the purchase price, also known as a dividend yield. For bonds, it is the coupon rate divided by the market price, called current yield.
The Core Personal Consumption Expenditures index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices.
Any references to specific securities or market indexes are for informational purposes only. They are not intended as specific investment advice and should not be relied on for making investment decisions.
Diversification does not eliminate the risk of experiencing investment losses.
Investing involves risk including potential loss of principal. Foreign investing involves special risks such as currency fluctuations and political uncertainty. ALPS is unaffiliated with Stadion Money Management.
The Reports’ commentary, analysis, opinions, advice and recommendations represent the personal and subjective views of the Author, and are subject to change at any time without notice.
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The Stadion Funds are distributed by ALPS Distributors, Inc. An investment in the Funds involves risk, including loss of principal.