U.S. Stocks achieved strong gains in the last full month of summer, with the Vanguard 500 Index (our S&P 500 proxy) rising 4% for August, the biggest one-month return since February. Although they continue to lag on a year-to-date basis, smaller companies outperformed larger caps in August with the iShares Russell 2000 Index rising 4.8%. Among positive economic news, second quarter U.S. GDP growth was revised slightly upward to 4.2%, as consumer spending, business investment, and exports (among other areas) rebounded after a weak first quarter. Other closely watched economic indicators include housing data, which continues to be mixed but showed some improvement in homebuilding, and home sales, based on August data releases.
Overall, the U.S. economic recovery is viewed as further along relative to that of other developed markets, such that the Federal Reserve is gradually removing its support, whereas central banks in Japan and Europe are committed to maintaining or even expanding their stimulus efforts. Global central bankers made headlines in August as they met in Jackson Hole, Wyoming, for their annual gathering. Federal Reserve Board Chair Janet Yellen’s speech there reaffirmed the Fed’s assessment that with economic growth and employment improving, and in the absence of worrisome inflation trends, the Fed is comfortable reducing its bond purchases even as it expects to keep interest rates low for the foreseeable future, awaiting further improvement in employment. This outlook was also covered in detail at the Fed’s July meeting. The minutes (released in August) acknowledged that growth and employment have, in fact, improved more quickly than anticipated, which could at some point require a sooner-than-anticipated shift in interest-rate policy. The pace and timing of the Fed’s decisions on rates remains an area of uncertainty, but the market still does not expect a move to tighten policy before mid-2015.
Developed international stocks were very slightly positive in August, with the Vanguard FTSE Developed Markets ETF benchmark up 0.3%. Worries re-emerged about deflation and faltering growth in the eurozone; however, investors seemed to take solace in European Central Bank President Mario Draghi’s remarks at Jackson Hole, which affirmed the ECB’s commitment to using “all available instruments” to fight deflation. Speculation was high that the ECB would announce additional policy actions during its September meeting, and European bond yields fell in anticipation. Japanese stocks declined slightly as a spate of short-term economic data disappointed. Emerging markets remained positive for the month, largely due to strong performances in Latin American markets Brazil and Mexico.
Continuing the year’s trend, core bonds also rose for the month—the Vanguard Total Bond Market ETF was up 1.1%—as U.S. Treasury yields fell. The benchmark 10-year Treasury closed the month at 2.34%, down from 3% at the end of 2013. Global bond yields in other developed markets are very low, which may be one factor driving investors toward the relatively higher yields offered in the U.S. market. It is also the case that ongoing geopolitical tensions, which flared up in Ukraine during the month, may prompt flight-to-safety buying with Treasurys as a beneficiary. After a weaker patch midyear, high-yield bonds have bounced back, rising 1.5% in August.
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