In August bad news for the economy was good news for equity markets as investors interpreted weak economic data points as a reassurance of more easing from global central banks. Equity markets were broadly positive while credit markets remained flat.  Volume was low as seasonality and directional uncertainty forced many investors to the sidelines.  The environment looks to ramp back up next month as the summer concludes, central banks meet and the election season hits the home stretch.

Economy

The pace of negative economic data slowed in August, as represented by the Citigroup Economic Surprise Index. After plummeting for most of 2012, the index turned up in late July and continued to approach positive territory throughout August. The index indicates that data levels for major economic reports are starting to post more in-line with consensus expectations.

  • Labor markets turned in a surprise performance in July for the first time in recent memory.
    • Nonfarm payrolls grew 163,000 in July and the unemployment rate increased 0.1% to 8.3%.  While it was relatively good news, labor markets remained stressed.
    • Offsetting the improvement in July was downward revisions to June labor data, which now show job growth of 64,000 as opposed to the 80,000 initially reported.
    • As we write, the August unemployment report has been released and indeed shows that July’s positive report was an outlier as only 96,000 jobs were created in August, well below expectations.  We will have more on the August report in next month’s update.
  • There was positive consumer data released in August as retail sales rose slightly in July for the first gain in four months.
  • Consumers also received favorable news from the July personal income and spending report.
    • For the third consecutive month personal income rose by 0.3%.
    • The improved trend in income led to higher consumption as well.  Personal consumption fell in preceding months leading to concern that consumers were pulling back from the economy.  The July report eased those fears.
  • The important housing sector remains mixed at best.
    • The National Association of Home Builders (NAHB) sentiment index increased 2 points to 37 in July.  The index is at its highest reading since early 2007 but remains well below its pre-crisis peak.
    • On the other hand there was a slight -1.1% slowdown in the number of housing starts, offsetting some of the optimism in the NAHB report.
    • In terms of home prices, there was general improvement in the month.  The S&P/Case-Shiller 20-City Home Price rose, as home prices increased in 19 of 20 cities with Dallas the only city to post a negative return.

Equities

In an environment marked by extremely low trading volumes and volatility, continued optimism over further central bank intervention propped up investor risk appetites.

  • Equity markets rose for the second month in a row, defying conventional warning signs of meager economic growth, mediocre earnings, and a bevy of potentially negative catalysts on the horizon.
    • U.S. stocks posted a modest uptick in August, with the S&P 500 rising 2.3%.
    • The MSCI All World Index, which includes both developed and emerging market equities, advanced 2.2% for the month. Most of the gains occurred early in the month before flat-lining the last few weeks.
    • Europe was the top performing major market segment, rising 4.4%. Absent a currency boost, Europe performed in line with the U.S. at about 2.4%.
    • Emerging markets and Asia did not fare as well, slipping approximately -0.3% each in the month.
  • Realized volatility was extremely low, which is not atypical for a summer month. However trading volumes in August were shockingly weak with the daily number of shares exchanged plummeting to their lowest levels of the year. The low volume levels are concerning and cannot be entirely attributed to seasonality.
  • Increased risk appetites manifested in higher returns for small cap stocks, although dispersion of returns between the various market cap segments was modest.
  • From a style standpoint, growth stocks outperformed value and retain a substantial year-to-date lead.

Fixed Income

Core taxable bonds, as represented by the BC Aggregate Index, were flat in August with a 0.1% gain. Price depreciation eroded a majority of income for the month as Treasury yields backed up.

  • The 10 Year Treasury finished the month at 1.6% as Treasuries sold off slightly.
    • The curve steepened as long rates backed up while short rates remained anchored.
  • Investment grade corporate bonds cooled off and posted flat returns of +0.2% for August after a very strong July.
  • Agency MBS was flat, with a return of +0.1% as prepayments impaired coupon income.
  • Intermediate municipal bonds, as measured by the BC 1-10 Year Index, were unmoved during August as price depreciation cancelled out income.

Alternatives

In an otherwise quiet month of trading, alternative strategies were largely positive, failing to match the performance of global equities but outperforming most fixed income indices.

  • The best performing alternative strategies in August were Event Driven and Long/Short Equity.
  • On the negative side, managed futures strategies struggled yet again, as the choppy trading environment in commodities and financial futures continued to pose challenges for systematic managers. Positive trends in energy and a handful of industrial and precious metals provided positive returns but reversals in various soft commodities hurt performance.
  • Commodities overall were strong, aided by a 9% rise in crude oil prices. Gold was positive, but lacking import demand from India remains a concern.

Disclosures

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the Funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.

There are risks involved with investing, including loss of principal. Current and future portfolio holdings are subject to risks as well. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments and smaller companies typically exhibit higher volatility. Bonds and bond funds will decrease in value as interest rates rise. High-yield bonds involve greater risks of default or downgrade and are more volatile than investment-grade securities, due to the speculative nature of their investments. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.

Diversification may not protect against market risk. There is no assurance the objectives discussed will be met. Past performance does not guarantee future results Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.