While the current economic environment appears generally balanced, that balance appears to be growing more precarious. Growth and expansion continue to be displayed in some data, such as the unemployment rate, which fell to 5.4% in July from 5.9% in June. Likewise, GDP is expected to grow at a 6.4% pace in the third quarter, following similar growth in the second quarter. Furthermore, the ISM Manufacturing Survey reported at 59.9 in August, representing positive sentiment in the manufacturing sector. However, on the heels of the computer chip shortage, additional glitches in the supply chain continue to appear. Many S&P 500 companies are stating that shortages are becoming problematic and are increasingly likely to hamper both revenue and profits. Supplies are not the only shortages potentially faced by businesses, as increasing employee turnover amid the difficulty in finding employees also threatens growth. On the other side of the transaction, the consumer — long steadfast in supporting the economy with robust consumption — appears to be losing vitality, as consumer confidence plummeted to 113.8 in August from July’s reading of 125.1. This change in consumer sentiment might also be evident in Retail Sales figures, which fell 1.1% in July, following a 0.7% rise in June. The waning consumer confidence and supply chain issues, when combined with recent, somewhat precarious events in the geopolitical arena, may suggest that a bumpy ride could be in store for the U.S. economy.
On the tails of growing corporate profits, equity markets generated strong returns during August. While all indices shown posted solid monthly results, large-cap growth stocks returned to favored status and propelled the NASDAQ and S&P 500 indices to monthly return leadership at 4.09% and 3.04%, respectively. Domestic indices continue to compare favorably to foreign stocks, especially over longer periods. However, one may wonder when this trend might reverse, or revert to the mean, and lead these markets higher. Energy stocks lagged other sectors once again in August, posting the only negative sector return at -2.04%. Meanwhile, Industrials also continued their recent laggard ways, pulling down the DJIA, despite the large-cap nature of that index.
Whether looking at monthly or year-to-date results, positive returns prove sparse in the bond market. August saw interest rates move higher throughout the yield curve, leading to mostly negative bond returns (as bond prices move in opposite direction of interest rates). Only high-yield bonds, whose returns often correlate more closely with stocks, provided positive results for the month. This is also largely true of year-to-date results, with high-yield providing the only significant positive returns for that period, as well. Very short bonds, such as T-Bills and 1-3 year Treasuries, whose rates did not see as significant a rise, also show positive — albeit slight — YTD results. Results for all other indices displayed have been hampered by this rising rate environment.
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