August was a hot month for US equities. The buoyant US economy, confident consumers, and balanced testimony from the Federal Reserve, along with some progress regarding trade, helped lift US stocks to new all-time highs. Outside of the US, the markets faced headwinds.
Large company US stocks climbed 3.3% in August. Shares of smaller companies did better, advancing 4.3%, and the technology-heavy NASDAQ rose even faster, up 5.7% for the month. The US bond market was in positive territory for the month, too, with corporates and Treasuries rising 0.6%. Dollar strength persisted and foreign markets struggled.
US Economy. US GDP growth was revised up to 4.2% (annualized) for the second quarter. Economic strength is expected to continue into the back half of this year, with growth anticipated to be 3% annualized in the third quarter. Consumer sentiment continues to hit cycle highs.
Fed. The tone from the Federal Reserve Bank of Kansas City’s Economic Policy Symposium in Jackson Hole, Wyoming in mid-August was generally constructive. Economic risks were seen as broadly balanced, with fiscal policy, easy financial conditions, and a tight labor market providing potential stimulus, but trade a potential drag. Fed policy makers meet again in mid-September, and another hike in their target for short-term interest rates is likely.
Earnings. It was a strong close to a stellar season. Earnings increased by 21% for S&P 500 companies during the second quarter. Soon after Apple reported quarterly earnings, it’s market capitalization pushed above $1 trillion – a first for a US company.
International Developments. The US and Mexico reached a two-way trade deal, and negotiations between the US and Canada are intensifying. However, rising short-term US interest rates are proving to be a headwind for many countries. Emerging markets economies, in particular, are being squeezed. US dollar strength was a main factor contributing to non-US stock price weakness in August.
Closing Thoughts. The gap in performance between US and non-US markets was particularly wide this month: large cap US stocks outperformed international developed market stocks by 5% and Emerging Markets by 6%. This is a clear illustration of price divergence and price volatility. Be prepared psychologically for more volatility as we head into fall. From a practical perspective, staying invested with a broadly-diversified portfolio yields the best results over the long run.
Rob Kania is Principal and Co-Founder of Laurentide Advisory