Key Points:
- The S&P500 experienced its 7th consecutive month of positive returns with a 3.04% gain in August.
- Risks to the global economic recovery include new cases of a mutated coronavirus, tension in the middle east and inflation remaining stubbornly high.
- The Federal Reserve is discussing tapering its bond buying program and raising rates to hold off an overheating economy and corresponding inflation.
The threat of a mutated coronavirus slowing economic growth, tensions in Afghanistan and another month of higher inflation were no match for global stocks in August. The S&P500 posted its third best return of the year, gaining 3.04% and continuing its streak of 7 consecutive positive monthly returns since February. Low interest rates and strong corporate earnings continue to propel the index to new highs. Growth stocks drew investor demand as the Russell 1000 Growth gained 3.74% for the month. Financials (+5.14%) were the strongest sector as bond yields moved higher while energy stocks (-2.04%) were the only negative sector in the S&P500. OPEC’s plan to gradually increase production and the threat of a slower economic opening in the US weighed on energy prices. Small cap stocks rebounded after a brief selloff in July. Through the first 8 months of the year the S&P500 has gained 21.58% while the Russell 2000 is up 15.83%.
International markets were modestly higher with the MSCI EAFE gaining 1.76% in US Dollars. Emerging markets rebounded from a tough July when investors were spooked by a tech crackdown by the Chinese government. A resurgence of Covid infections in Asia have caused ports to close and economists to rethink global economic growth forecasts. Supply chain bottlenecks coupled with a resurgence in demand could keep inflation around longer than the Fed wishes.
The bond market detracted as Treasury yields climbed in August. The Bloomberg Barclays US Aggregate Bond index lost 0.19% for the month and is down 0.69% for the year. All eyes are on how the Federal Reserve will taper its monthly bond buying program which started at the onset of the pandemic. If inflation continues to remain high, the Fed could then begin raising rates to cool down the economy. Economist from Prudential do not think that will occur until the second half of 2022 at the earliest while Nuveen Investment Management believes that rate hikes will not begin until 2023 unless inflation runs rampant.
Sources: Morningstar Direct, Wall Street Journal, Prudential, Nuveen