The U.S. economy remains firmly in expansionary territory, supported by an upbeat consumer and a strong corporate earnings backdrop. Second-quarter U.S. Real Gross Domestic Product was revised up slightly to a 4.2% annualized rate, marking the strongest quarterly growth rate since the third quarter of 2014. Labor conditions remain tight. Weekly jobless claims continued to grind lower through most of August, while the unemployment rate ticked down, coming in at 3.9% through July. The manufacturing side of the economy is also performing well. The Institute for Supply Management’s Purchasing Managers Index rose in August to 61.3, boosted by a sharp jump in new orders that continues to suggest a well-fueled manufacturing base. The housing market appears to be one of the few areas of the economy that is showing some weakness. Tight housing supply has continued to put upward pressure on prices, deterring many would-be buyers. Markets responded favorably to the trade deal that was reached with Mexico in the waning days of August. Markets also remain hopeful that a trilateral trade deal will be agreed upon with Canada by the end of the year. International currency markets were rattled last month as Turkey’s currency collapse fueled fears of a spillover effect. European officials voiced growing concern that Turkey’s problems could particularly affect Spanish and Italian banks that may have outsized exposure to Turkish debt.
Domestic markets were up markedly in August with the S&P 500 Index, the Dow Jones Industrial Average and the NASDAQ Index all reaching record highs during the month. The technology-heavy NASDAQ continues to lead the way, up over 18% year-to-date, almost doubling the return of the S&P 500, and indicative of a market that prefers “growth” companies over their “value” counterparts. U.S. small-cap stocks also continue to perform well, up approximately 14% year-to-date (Russell 2000 Index). Investors appear to be favoring smaller companies this year as they tend to be less exposed to a strengthening dollar and ongoing trade tensions. Conversely, Developed International (MSCI EAFE) and emerging markets (MSCI EM) posted losses of 1.9% and 2.7%, respectively.
Government and corporate bond rates generally decreased throughout the month, resulting in positive returns across the bond market. Nevertheless, most investment-grade bonds remain down year-to-date. The yield on the 10-year Treasury closed the month at 2.86%, down slightly from 2.96% in July. Positively and indicative of a strong economic backdrop and positive equity returns, the high-yield market continues to perform well and is up approximately 2% year-to-date. Inflation and inflation expectations are firming, but remain contained. While Fed Chair Powell has expressed concern about intensifying global trade tensions, the committee is widely expected to increase its Fed Funds Target Rate at its upcoming September meeting.