Economic Backdrop

Economic expansion continued to unfold at disparate paces across developed markets in August. Major central banks held monetary policies stable—even as new data showed signs of shifting growth trajectories, supporting arguments for modifying current levels of accommodation. U.S. Federal Reserve (Fed) Chair Janet Yellen gave a speech that mirrored minutes from the latest U.S. Federal Open Market Committee meeting, emphasizing the need to maintain loose policy amid persistent labor-market slack. The Bank of England (BoE) did not make changes despite its Monetary Policy Committee recording the first dissenting votes in favor of an interest-rate increase since July 2011. The BoE maintained a dovish outlook for prices in its quarterly Inflation Report and indicated it would focus on wage growth when determining the timing of interest rate increases. It also asserted that hikes will likely be gradual and limited. European Central Bank (ECB) President Mario Draghi reaffirmed his willingness to pursue further accommodative policy actions in late August despite the central bank’s decision to hold course earlier in the month. Mr. Draghi made good on these statements in early September by cutting interest rates and announcing the ECB would soon begin making asset purchases. Finally, the Bank of Japan’s early August announcement showed an ongoing commitment to close the shortfall from its inflation target.

U.S. consumer confidence reached a post-recession high in late August despite coming in slightly lower than expectations in an early-month survey. The labor market maintained positive footing, with low initial jobless claims throughout the month, while ongoing unemployment claims remained at or near their lowest levels since the recession ended. Nearly 60% of U.S. workers expressed satisfaction with job security, representing an all‑time high in the survey’s approximately 20-year history. Purchasing managers for the manufacturing sector reported strength in a preliminary report that was bolstered by improving employment conditions. A regional Fed manufacturing survey depicted slowing growth in key components, yet this was offset by a 22-year-high confidence reading in business activity. Industrial production gained further traction in July, up for the sixth straight month and from a year earlier. Personal incomes grew more slowly in July than in recent months, and consumer spending declined despite recent strength. Retail sales were flat in July, but online retail sales increased to the best level since 2013. The U.S. economy grew at a 4.2% annualized pace during the second quarter, a boost from the initial estimate, reinforcing the strength of last quarter’s rebound.

A deceleration in U.K. manufacturing growth was mild enough to keep preliminary August output readings in above-average territory. The slowdown was softened by rising new orders, implying a likely reacceleration in the coming months. Retail-linked distribution jumped more than expected, continuing to rebound from an early summer setback that centered on weak supermarket sales. House prices returned to growth territory following a sluggish July. The labor market continued to improve, as claimant counts and unemployment both declined. However, average earnings were down from a year ago. Prices at the producer and consumer levels dropped through midsummer, even as activity rose across the manufacturing, construction and services sectors. Overall economic growth during the second quarter was measured at nearly a percentage point higher from the first quarter and 3.2% higher from a year earlier.

Early readings for Eurozone inflation during August showed a slight deceleration in price growth. Core-price inflation, however, which excludes energy, food, alcohol and tobacco, reached a multi-month high without the weight of a significant decline in energy costs. Purchasing managers for the manufacturing and services sectors reported slowing output growth in August; the former exhibited a more marked decline, while the latter fell after reaching a three-year high in July. The slowdown lends validity to weak economic sentiment and consumer-confidence reports across the Eurozone; it also highlights weakness in core German and French business condition surveys. European Union (EU) unemployment figures for July were unchanged at 11.5%. Youth unemployment, a persistent weak spot, showed slight improvement. The first estimate of second-quarter EU economic growth came in flat against expectations for a small increase.

Market Impact

Favorable fixed-income market performance in August compensated for mediocrity in the previous month. The high-yield market rotated into a lead position, followed by the corporate bond sector, securitized debt and government issues. U.S., U.K. and German government bond yields generally declined across the yield curve (yields move inversely to prices), with long-term yields falling more than their short-term counterparts. This flattening benefitted investments with longer maturities on a relative basis. U.S. dollar‑hedged positions were mostly rewarded relative to local-currency-denominated debt, especially the Euro. Exposure to conflict regions (Russia, Ukraine) and less financially stable countries (Argentina, Venezuela) detracted overall. However, external debt elsewhere in Latin America (Brazil, Panama and Peru) fared well.

Equity markets generally fared better in August than during the prior month. Regionally, the Americas led Europe, which outpaced Asia. Brazil was the top-performing country, followed by Egypt and Peru. Turkey trailed Israel, Italy and Austria to end up the worst performer for the month. On a global sector basis, healthcare joined information technology at the front in performance terms, while telecommunications and materials fell to the rear. Outperformance among U.K. mega-sized companies eased even as it persisted elsewhere in Europe. In the U.S., traditional defensive sectors (utilities, healthcare and consumer staples) led their cyclically-sensitive counterparts across large- and small-sized companies.

Index Data

  • The Dow Jones Industrial Average Index rose 3.60%.
  • The S&P 500 Index increased by 4.00%.
  • The NASDAQ Composite Index advanced by 4.99%.
  • The MSCI AC World Index, used to gauge global equity performance, increased by 2.21%.
  • The Barclays Global Aggregate Index, which represents global bond markets, rose by 0.55%.
  • The Chicago Board Options Exchange Volatility Index, a measure of implied volatility in the S&P 500 Index that is also known as the “fear index,” decreased in the month as a whole, moving from 16.95 to 11.98.
  • WTI Cushing crude oil prices, a key indicator of movements in the oil market, moved from $98.17 a barrel at the end of July to $95.96 on the last day in August.
  • The U.S. dollar strengthened against the euro, sterling and yen. The U.S. dollar ended July at $1.32 against the euro, $1.66 versus sterling and at 103.89 yen.


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