Global Markets Up for August
Global equity markets were overwhelmingly up for the month of August, on the way to record–setting performances. But it wasn't just U.S. equity markets that performed well this month – developed and emerging markets outside the U.S. turned in very positive performance too, with many emerging markets coming close to being up 10% for the month.
For the month of August:
- The DJIA was up 1.2%;
- The S&P 500 was up 2.9%;
- NASDAQ was up 4.0%; and
- The Russell 2000 was up 2.6%.
So far in 2021, the markets have turned in excellent performance, as all of them are in double–digit YTD territory. And the records that have been broken so far in 2021 are nothing short of remarkable. Consider:
- The S&P 500 has recorded 53 new record highs so far in 2021
- The S&P 500 has recorded its strongest year–through–August (+20.4%) performance since the +21.4% rise in 1997
- For perspective, since 1971 the S&P 500 has seen an average YTD return through the end of August of +6.07%
The themes that helped shape market performance were many, including: rising inflation; an accommodative Federal Reserve; declining consumer sentiment; mostly positive corporate earnings; continued red-hot housing with some nuggets of cooling; concerns that the delta variant might stall economic activity; and disappointing economic data hampered by supply chain issues.
Volatility, as measured by the VIX, trended down in August, although there were a couple of spikes mid–month as it came to rest slightly over 16.
West Texas Intermediate crude also trended down in August, ending the month at $67.50/barrel, for a monthly loss of a about $3.75/barrel. For perspective, WTI started the year at just about $48/barrel.
Market Performance Around the World
Investors looking outside the U.S. saw very good performance, as all 36 developed markets tracked by MSCI were positive for the month of August. And the performance for emerging markets was almost as good, as of the 40 developing markets tracked by MSCI, only 1 of those was negative in August, as the MSCI EM 50 lost a paltry 0.17%.
Sector Performance Was Also Very Good
For the month of August, sector performance was mostly positive, as 10 of the 11 sectors ended the month green, with the volatile Energy sector being the only one in the red, as it lost more than 2% on the heels of last month's large negative return.
In addition, as has been the case for some time, the range in sector–returns was wide, with Financials up 5% and Energy down more than 2%. And unpacking the various sector returns further, we can almost detect another mini–sector rotation emerging, as Financials jumped to the front of the pack after sitting towards the rear of the pack for the previous month.
Here are the sector returns for the month of August as well as July (two very short time–periods):
Consumer Confidence Sinks
On the last day in August, the Conference Board reported that its Consumer Confidence declined in August, after falling in July. As of August 31st, the Index is at 113.8 (1985=100), which is down significantly from 125.1 in July.
Further, it was reported that:
- The Present Situation Index, which is based on consumers' assessment of current business and labor market conditions, fell to 147.3 from 157.2 last month.
- The Expectations Index, which is based on consumers' short-term outlook for income, business, and labor market conditions, fell to 91.4 from 103.8.
Said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “Concerns about the Delta variant and, to a lesser degree, rising gas and food prices – resulted in a less favorable view of current economic conditions and short–term growth prospects. Spending intentions for homes, autos, and major appliances all cooled somewhat; however, the percentage of consumers intending to take a vacation in the next six months continued to climb.”
“Consumers' appraisal of current business conditions declined in August.
- 19.9% of consumers said business conditions are “good,” down from 24.6%.
- 24.0% of consumers said business conditions are “bad,” up from 20.0%.
Consumers' assessment of the labor market eased.
- 54.6% of consumers said jobs are “plentiful,” down from 55.2%.
- 11.8% of consumers said jobs are “hard to get,” up from 11.1%.
Expectations Six Month Hence
Consumers optimism about the short–term business conditions outlook deteriorated in August.
- 22.9% of consumers expect business conditions will improve, down from 30.9%.
- 17.8% expect business conditions to worsen, up from 11.9%.
Consumers were somewhat less optimistic about the short–term labor market outlook.
- 23.0% of consumers expect more jobs to be available in the months ahead, down from 25.5%.
- 18.6% anticipate fewer jobs, up from 17.8%.
Consumers were less upbeat about their short–term financial prospects.
- 17.9% of consumers expect their incomes to increase, down from 20.0%.
10.1% expect their incomes will decrease, up from 8.8%.”
Gross Domestic Product Up
On August 26th, the Bureau of Economic Analysis reported that real gross domestic product (GDP) increased at an annual rate of 6.6% in the second quarter of 2021.
Here is an explanation of the recent increase in GDP from the Bureau of Economic Analysis:
“The increase in real GDP in the second quarter reflected increases in personal consumption expenditures (PCE), nonresidential fixed investment, exports, and state and local government spending that were partly offset by decreases in private inventory investment, residential fixed investment, and federal government spending. Imports, which are a subtraction in the calculation of GDP, increased.
The increase in PCE reflected increases in services (led by food services and accommodations) and goods (led by “other” nondurable goods, notably pharmaceutical products, as well as clothing and footwear). The increase in nonresidential fixed investment reflected increases in intellectual property products (led by research and development as well as software) and equipment (led by transportation equipment). The increase in exports reflected an increase in goods (led by nonautomotive capital goods) and services (led by travel). The decrease in private inventory investment was led by a decrease in retail trade inventories. The decrease in federal government spending primarily reflected a decrease in nondefense spending on intermediate goods and services. In the second quarter, nondefense services decreased as the processing and administration of Paycheck Protection Program loan applications by banks on behalf of the federal government declined.”
Housing Data is Mixed (Confusing)
The U.S. Census Bureau and the U.S. Department of Housing and Urban Development distributed two press releases within a week of one another and when reviewed together, they paint a confusing picture. To summarize: building permits are up, housing starts are down, housing completions are up – and sales of new single–family homes were down a staggering 27.2% relative to this time last year.
On August 18th, it was reported that:
Building Permits Were Up in July
- Privately–owned housing units authorized by building permits in July were 2.6% above the June rate and 6.0% above the July 2020 rate
- Single–family authorizations in July were 1.7% below the June figure
- Authorizations of units in buildings with five units or more were at a rate of 532,000 in July
Housing Starts Were Down in July
- Privately–owned housing starts in July were 7.0% below the June estimate but 2.5% above the July 2020 rate
- Single–family housing starts in July were 4.5% below the June figure
- The July rate for units in buildings with five units or more was 412,000
Housing Completions Up in July
- Privately–owned housing completions in July were 5.6% above the June estimate and 3.8% above the July 2020 rate
- Single–family housing completions in July were 3.6% above the June rate
- The July rate for units in buildings with five units or more was 426,000
Then on August 24th, it was reported that:
- Sales of new single–family houses in July 2021 were 1.0% above the June rate but 27.2% below the July 2020 estimate
- The median sales price of new houses sold in July 2021 was $390,500
- The average sales price was $446,000
- The seasonally–adjusted estimate of new houses for sale at the end of July represents a supply of 6.2 months at the current sales rate
Consumer Price Index Up in July
Mid-way through the month, the Bureau of Labor Statistics reported that the Consumer Price Index increased 5.4% over the past 12 months. Surprisingly, media outlets ran with headlines like these: “Inflation is Not as Bad as Feared” and “Inflation Fears Moderate” and even this one: “Core Inflation Starts to Ease.”
And while it's technically true that inflation “only” rose 0.5% in July after rising 0.9% in June – and having risen every month so far in 2021 – keep in mind that an increase of 0.5% every month is going to bring annual inflation north of 6%.
Here are a few of the more troublesome inflation numbers – over the past 12 months:
- Energy is up over 23%;
- Fuel oil is up over 39%; and
- Used cars and trucks are up over 41%.
Producer Price Index Jumps 1%
Keeping with the inflation theme, the BLS also reported that the Producer Price Index increased 1.0% in July, after moving up 1% in June and 0.8% in May. Maybe more startling was the fact that the final demand index moved up 7.8% for the 12 months ended in July, the largest advance since 12–month data were first calculated in November 2010.
- Nearly three–fourths of the July increase in the final demand index can be traced to a 1.1% advance in prices for final demand services.
- The index for final demand goods rose 0.6%
- Prices for final demand less foods, energy, and trade services moved up 0.9% in July, the largest advance since climbing 1.0% in January
- For the 12 months ended in July, the index for final demand less foods, energy, and trade services rose 6.1%, the largest increase since 12–month data were first calculated in August 2014
Small Businesses Struggling Mightily
The National Federation of Independent Businesses reported that “the NFIB Small Business Optimism Index decreased in July to 99.7, a decrease of 2.8 points, reversing June's 2.9-point gain. Six of the 10 components declined, three improved, and one was unchanged. The NFIB Uncertainty Index decreased seven points to 76, indicating owners' views are held with more certainty than in earlier months.
Other key findings include:
- Sales expectations over the next three months decreased 11 points to a net negative 4% of owners.
- Owners expecting better business conditions over the next six months decreased eight points to a net negative 20%.
- Earnings trends over the past three months decreased eight points to a net negative 13%.
As reported in the NFIB's monthly jobs report, 49% of owners reported job openings that could not be filled, a 48–year record high. Owners' plans to fill open positions remain at record high levels, with a seasonally adjusted net 27% planning to create new jobs in the next three months, down one point from June's record high reading.”
More Inflation Worries
While there are lots of data points that can lead to declining optimism, inflation is one of them as the NFIB's report found that:
- 46% of owners (seasonally adjusted) reported raising average selling prices.
- 52% of owners reported raising average selling prices, two points higher than June. Price increases in wholesale and retail trades posted significant declines. The largest increases in price–raising activity were in the non–professional services and transportation.
- Price hikes were the most frequent in wholesale (73% higher, 0% lower), manufacturing (61% higher, 6% lower), and retail (57% higher, 7% lower).
- Seasonally adjusted, 44% plan price hikes.
Maybe a silver lining (depending on your perspective of course) is the fact that a net 38% of owners (seasonally adjusted) reported raising compensation, down one point from June's record high of 39%.
Plus, a net 27% plan to raise compensation in the next three months, up one point from June and a 48–year record high reading.
Optimism for the Remainder of 2021??
Before the stock markets closed out the month, a lot of media outlets were picking up a summary that suggested the remaining four months of the year are likely to be positive.
More specifically, as the chart below shows (it's not through the technical end of the month, but it's very close), the last five times that the S&P 500 rose more than 15% (going back to 1954), investors were rewarded with positive performance for the remainder of the year 4 times.
But that one year it didn't hold true was painful.
Of course past performance is no guarantee of future results.
But Wall Street and Main Street can remain optimistic.
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