John Gorlow
| Sep 03, 2013
August Review
U.S. stocks took a step backwards over the month of August due to three sources of economic uncertainty: the potential intervention in the conflict in Syria, the plan on the part of the Federal Reserve to scale back its stimulus program, and the prospect of another congressional debt ceiling debate. Volatility spiked and the S&P 500 shed 3.1%, amounting to its worst monthly performance in over a year—pulling YTD returns down to 16.15%. Slowing new home sales, falling durable goods orders and sluggish retail compounded the turbulence. The 2.5% upward revision for second quarter U.S. growth came as bright spot amongst the other news
Eurozone, Japanese and US Stocks all fell last month, but Eurozone stocks outperformed the US and Japanese shares on optimism that the zone's economy might be gaining momentum relative to the rest of the developed world. The MSCI European Market Index closed out August with a loss of just 1.28%. Japanese stocks, as measured by the MSCI Japan Index, fell 2.15%. The MSCI composite index for international developed markets (EAFE) gave up 1.32% last month lowering its YTD returns to +8.15%.
Looking at the developing markets, the MSCI Emerging market stock index retreated 1.74%. Year to date, the developing market index is down 11.91%. Investors poured money into these markets for more than a decade, but these same investors are now shying away. The currencies in India, Turkey, and Indonesia among others are plummeting. Some investors fear another 1997-98 Asian style financial crisis might be on the horizon. Nobel laureate Paul Krugman is less certain of turmoil however saying, "the crucial point back then was that...many business [in the crisis countries] had large debts in dollars, so that falling currencies caused their debts to soar, causing widespread financial distress. That problem isn't completely absent this time around, but it looks much less serious." Note that the twin contractions of local stock prices and declining currency conversions lead to attractive asset valuations and export-led recoveries which should eventually deliver better returns.
Even if a multi-year bear bond market in yields has begun, a significant counter-trend rally is possible this fall. The Fed may introduce tapering that is less than forecast or could introduce stronger forward guidance which might prove reassuring to the markets and lead to a relief rally. In August, the yield on the 10-Year Treasury Note increased by 19 basis points to end the month at 2.772% or 1.10% higher over the past four months. The 30-Year Bond yield fell 2 basis points to 3.694%, while the 5-Year Note yield climbed 1 basis point to 1.624%.
August was a challenging month for global equity and fixed income markets. However price strength across energy markets and precious metals made commodities a respite during the overall decline. Oil climbed to 3.3% in August to $114.35 per barrel due to possible supply disruptions in Syria and Egypt. Gold and silver gained 6.1% and 18.6% respectively for the month, coming back 21.4% and 37.8% respectively after their one-year lows in late June.
In conclusion: a number of short-term risks—such as an expansion of the conflict in Syria or the spiraling currency crisis in the emerging markets—could create additional uncertainty in the coming month. Disciplined investors with diversified and balanced portfolios are well positioned to ride out these unknowns, and reap the long-term rewards.