The U.S. economy continues its steady, albeit slow, expansion supported by a strong consumer confidence backdrop and an overall optimistic economic outlook. Revised second-quarter Real GDP Growth came in at 3.0%, exceeding analysts expectations and logging the highest growth rate since 2015. The Consumer Confidence Index and the Michigan Consumer Sentiment Index both reported further increases in August, suggesting that U.S. consumers remain optimistic about their prospects. These two indices are at their highest levels since late 2000. The unemployment rate rose slightly from 4.3% to 4.4% in August while employers added 156,000 jobs. Despite tightening labor markets, wage growth remains contained. Average hourly private-sector earnings increased by 2.5% in August from a year ago, a growth trend that has been in place since April of this year. Manufacturing activity appears robust with the ISM manufacturing index jumping to a six-year high in August to 58.8 (any reading above 50 indicates expansionary conditions). The impact of Tropical Storm Harvey coupled with geopolitical tensions with North Korea will be on investors’ minds as we enter the last month of the quarter. Investors will also be grappling with a seemingly paralyzed Congress as they return from their summer break and begin work on tax reform, immigration legislation, raising the debt limit, and disaster relief funding.
The stock market generally behaved in August despite increasing geopolitical tensions with North Korea and the treacherous aftermath of Tropical Storm Harvey. Technology stocks again led the way with the NASDAQ up 1.4% for the month while the Dow and S&P 500 indices posted returns of 0.6% and 0.3%, respectively. The NASDAQ is up over 20% for the year, a full 8 percentage points better than the S&P 500 and indicative of a market environment that is favoring “growth” over “value”. Small-cap stocks continue to lag as tax reform efforts appear stalled. Internationally, the MSCI Emerging Markets Index continued its winning streak, recording its eighth consecutive month of gains that has resulted in an eye-popping 28% year-to-date return.
The benchmark 10-year Treasury bond ended the month yielding 2.12%, falling to its lowest rate so far in 2017, while yields on short-term government bonds were generally unchanged. Credit spreads for both high-yield and U.S. investment-grade debt reversed trend and widened in August, apparently influenced by the potential for economic losses resulting from Tropical Storm Harvey. Given muted wage growth and inflation readings, some analysts are calling for a less than 50 percent chance of an additional interest rate hike in December. The Federal Reserve is still expected to commence the reduction of its $4.5 trillion balance sheet, although with the impact of Tropical Storm Harvey, the timeline may be extended into 2018.